U.S. exporters who are new to exporting should understand all of their available payment instrument options, and expanding upon the Letters of Credit and How They're Used blog post are methods to receive faster payment through these instruments. For example, the underutilized feature of discounting can enable exporters to receive payment much faster than the allotted timeframe within the letter of credit specifications but, it’s only available for a certain type of letter of credit.
To recap, a letter of credit is a form of payment that shifts the payment risk and responsibility to the foreign buyer’s bank. Payment for goods sold is made from the foreign buyer’s bank (issuing bank) to the U.S. exporter’s bank (negotiating bank) and then to the U.S. exporter. Final payment to the exporter ordinarily occurs when the exporter presents the required documents to their negotiating bank and they’re deemed compliant with the letter of credit. Two common types of letters of credit are sight and usance.
Under a sight letter of credit, payment is usually expected within 5-7 business days from the time that the negotiating bank receives documents that are compliant with the letter of credit, an activity known as ‘payment at sight’. This timeline can be somewhat accelerated if the negotiating bank is also acting as the confirming bank. When the negotiating bank ‘confirms’ the letter of credit, it may issue payment to the U.S. exporter prior to being paid by the issuing bank. The U.S. exporter incurs a cost for this confirmation, but it speeds up their payment process by about 48-72 hours from the receipt of complying documents by the negotiating bank.
Usance letters of credit call for payment to a U.S. exporter to be made at a certain time in the future (e.g. 90 days) rather than at ‘sight.’ A feature known as discounting can often be applied to this type of letter of credit which enables a U.S. exporter to receive payment for goods sold upon the presentation of complying documents rather than wait potentially weeks or months for the future due date. Through this feature, the negotiating bank provides payment to the U.S. exporter but takes a percentage, or discount, from their total proceeds in exchange for remitting payment in advance of the issuing bank remitting payment. The negotiating bank requires the letter of credit be confirmed but payment can made within 48-72 hours. The U.S. exporter benefits from receiving payment significantly faster while their foreign buyer has time to make the funds available for payment under the letter of credit.
If a commercial letter of credit is not feasible for a transaction but the foreign buyer is still looking for payment flexibility, an alternative approach to handling this foreign account receivable/open account is EXIM’s Export Credit Insurance. With an export credit insurance policy, U.S. exporters can sell with confidence, knowing their shipments are protected from buyer nonpayment due to commercial and political risks. For more information, schedule a free consultation with an EXIM trade finance specialist.
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August 19, 2021
Tagged: EXIM letters of credit
EXIM’s Blog postings are intended to highlight various facets of exporting, but the postings are not legal advice, and are not intended to summarize all legal requirements associated with exporting.