Discounting charges on letter of credit

Discounting charges on letter of credit

17 Aug 2018 05:59 PM
 

What is Discounting of Letter Of Credit?

International trade while being an essential component of business expansion and the export/ import industry also presents challenges like nature of the transaction, different trade laws of each country, overseas distance and the uncertainty regarding fulfilment of payment and other terms due to lack of trust between two parties involved. Letter of Discounting eliminates these difficulties and assures the seller of being paid as per the agreement terms. 

Letter of Credit discounting is a chief method of financing in international trade and is also known as a documentary credit. Letter of Credit assures the seller involved in a trade transaction that extends overseas through a financial institution's guarantee that if the buyer defaults on his terms of the payments as described by the agreement the seller will receive his due payments. The letter of Credit discounting serves as financial security for the businesses involved in either export or import or both.LC Discounting is considered a quintessential funding option as the financial institutions follow a mandatory verification process to confirm both parties' authenticity. Also, the chance of manipulating the discounting rate is minimal as only the prevailing rates apply to a Letter of Credit. Obtaining an LC discount for an exporter would mean access to funds that can be utilised to aid other operations of the business like production and payment. In a case where there is the disparity of thoughts regarding the time of payment between the buyer and the seller, LC Discounting allows the seller to get immediate payment for his sale while the buyer still enjoys the advantage of an extended period of payment as he is given a credit period to pay after receiving the goods. Eventually, the buyer pays a premium to the bank when making the payment as mentioned in the contract. 

letter of credit

Following are the steps that would entail the LC Discounting application process of a company to the bank. 

  1. The primary step would involve the beneficiary to submit the necessary financial documents and has to apply for the required facilities with a justification for the requirement
  2. The next step involves a personal interview of the exporters conducted by the bank wherein the field investigation team establishes their credibility after visiting their place for verification. 
  3. The bank checks the credit score of the applicant and further analysis of the background of the company like the nature of business and financial viability will be conducted. 
  4. The final step involves obtaining sanctions from the appropriate authorities. 


Standby Letter of Credit (SBLC) is a secondary payment method that adds an extra layer of security to the seller if the buyer doesn't fulfill the agreement.

Benefits of discounting charges on the Letter of Credit

The advantages of LC Discounting extends to the beneficiary/exporter wherein utmost security and cash inflow are some of the benefits enjoyed by the exporter. Following are the advantages of LC Discounting for the beneficiary/exporter:

  1. The exporter can enjoy operations' efficiency as receiving advance payment would allow smooth movement of working capital in the organization through positive cash flow.
  2. Another advantage is the speed of delivery of payment, which is received immediately before the bill's maturity date. This aids the various functions of the beneficiary's business during the production process and funds continuous operations that will either facilitate his business to either expand or sustain. 
  3. The credit risk is eliminated through LC Discounting as the seller is assured of the buyer's obligations being met if not by him then by the bank. 
  4. Since the bank discounts LC only after verifying the authenticity and establishing the credibility of both the parties involved in a trade  LC Discounting is a safe and secure mode of getting funds.
  5. The rates that apply to the Letter of Credit are prevailing discount rates, thereby ensuring no manipulation of the discount rates. 
  6. The beneficiary can build a stronger relationship with their trading partner as LC discounting enables the beneficiary to provide an opportunity of extended payment terms allowing a better-negotiating position.

Discounting of Letter of Credit with Myforexeye

Myforexeye provides two kinds of export finance consulting services, namely Export factoring and Export LC Discounting. The main factors that determine SMEs' export capability are cost and ease of accessibility as it requires large capital to sustain business operations in this industry. Myforexye extends to exporters the best quotes available in the market readily accessible through our user-friendly mobile application with no hassle of documentation and lengthy processes. Myforexeye allows exporters to compare the best possible rates that align with their needs and upon acceptance of the same by them, the funds are made available via banking channels. Through our convenient system, the user can enjoy thorough guidance through the approval procedure that requires necessary credit information, KYC, details of counterparties, LC issuing banks and business background and any additional information that might be specifically required for a customer. 

Conclusion

Myforexeye is the one-stop solution for all the forex needs of organizations irrespective of their scale and individual forex enthusiasts wherein our services discharged are powered by advanced technology, armed with the expertise of experienced professionals and executed by our specialized team. Our user-friendly platforms- web portal and mobile app encourage actualization of our objective of providing a transparent streamlined process which meets the forex demands of users in a convenient manner eliminating the aspect of hidden commissions. Our consultants help users maneuver challenges and risks associated with the forex market and render strategies and techniques to mitigate them. Enabled by our lack of obscurity, our services empower users to make savings corroborated by our platform that provides an insight into real-time rates and best quotations from banks to equip you with the best possible options, with forex risk management services.

Speak to one of our specialists to acquire a detailed understanding of LC Discounting service offered by Myforexeye.

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