- Easy access to working capital finance for Exporters
- Improved liquidity
- Improved confidence for cross-border trade
- Payment assurance for Exporters (especially in new trade relationships) since payment is guaranteed if documents comply to the terms of LC
Using LCs as a payment mechanism, offers numerous benefits over traditional methods, such as cash payments or wire transfers, primarily due to the increased levels of protection provided for both Buyers and Exporters throughout international trade negotiations. The binding nature (irrevocability) of a LC helps reduce overall risk associated with cross border transactions and ensures timely payment in addition to availing easy access to working capital finance. Additionally, an LC is based on the worldwide standard method of international trade, backed by a globally recognised documentary process.
For an importer, a LC shows the Exporter that the importer has the ability to pay for the goods and can be tailored to meet the importer’s needs, such as terms of shipping, delivery, insurance and quality inspection. An LC provides the comfort and assurance that goods are shipped in accordance with their requirements by ensuring compliant documents are presented before the supplier is paid.
For an Exporter, an LC enables an Exporter to transfer payment risk from its Buyer to the Buyer’s bank. Hence, an LC provides a secure payment method for international trade transactions where the Exporter can derive peace of mind that payment will be received after presentation of compliant documents.
Additionally, an Exporter will be able to optimise their cash flow by using a LC to raise finance, as funds can generally be advanced against compliant documents. This is generally known as LC Discounting/Negotiation whereby the Negotiating Bank agrees to make payment in advance to the beneficiary upon receipt of compliant documents or post acceptance from the Issuing Bank.