LC Replacement

Letters of Credit (LCs) are advantageous when the buyer and seller are trying to establish a new relationship and the parties don’t have a history together.  As soon as a buyer and seller establish a good working relationship, moving away from documentary collections and letters of credit are usually deemed more appropriate as it benefits both the buyer and the supplier.

This can be done through the implementation of a payables finance program and utilizing the electronic data from third party providers to efficiently approve invoices.

The strategy has been implemented in many cases by utilizing a buyer’s freight forwarder to review documents and conduct invoice approvals at point of FOB. In this example, the freight forwarder fulfills the role of the confirming bank in an LC transaction (in that they are aligning documents for approval). As a result, the buyer is now able to conduct approvals four to six weeks prior to the goods actually arriving at its physical location and the supplier can sell their invoice as soon as it’s been approved. In this process, the freight forwarder generally takes around three days to approve invoices that are being shipped Full Container Load and between five and seven days for invoices where goods must be consolidated.

The supplier saves time and can receive early payment from a multi-national bank without the costs associated with appointing a local confirming bank for the LC. The buyer also saves significant time, avoids all the costs associated with a LC and also has the ability to remove third party agents from the process.