If you’re an importer and your overseas supplier wants a huge deposit before they’ll supply the goods, what do you do? Consider a letter of credit.
Suppliers want money up front
If you haven’t worked with a supplier before, they’ll generally want a significant deposit before they’ll start work or send any goods – particularly if they’re overseas. This is understandable, but it creates real cash flow problems for most importers. In these situations, a letter of credit is an option.
Letter of credit – how it works
A letter of credit is a document that guarantees payment by the Lender to a third party if certain conditions are met. Importantly, it’s a way of dealing with your supplier’s demands without having to part with any cash up front. Here’s how a letter of credit works:
- Go to your Finance Broker
- Through your Finance Broker, you apply to a lender for a letter of credit.
- If approved, your lender will send the letter of credit to your supplier’s bank.
- Your supplier’s bank then notifies their client that the letter of credit has been received, and that they can ship the goods with guarantee of payment.
- You pay your supplier for the goods when you receive them.
Letter of credit – a specialist business finance product
Letters of credit can improve your cash flow. However, they can be expensive and they are a specialist area. Get the foreign exchange arrangements or loan conditions wrong, and it could cost you big time.