Letters of credit
A letter of credit is used to ensure that the parties perform their obligations under the contract without blocking the company’s working capital (unsecured letter of credit) without the need for debt financing (in the form of credit).
Advantages of letters of credit:
- For the seller — minimisation of the risk of the buyer defaulting on the contract after the seller has performed his obligations.
- For the buyer — minimisation of the risk of the seller’s failure to fully comply with its obligations under the terms and conditions of the contract.
- For the seller and the buyer — where the contract stipulates delivery of the goods/performance of the works on the condition of deferred payment, namely, in case of the issue of a deferred payment letter of credit:
- For the buyer — the opportunity to defer the payment (commodity credit) under the contract against obligations of the issuing bank under the letter of credit.
- For the seller — the opportunity to collect contractual payment (in case the documents are negotiated by the authorised bank) by the day of payment of reimbursement to the authorised bank by the issuer bank (i.e. by the day of the buyer’s performance of its contractual payment obligations).
Pivdenny Bank issues the following types of letters of credit for its clients:
Secured documentary letter of credit — to open an LC of this type and perform subsequent payments thereunder, the client must reserve the full amount of the LC in advance in the respective currency on a separate deposit account with the bank.
Unsecured documentary letter of credit — to open the LC, the client must provide collateral (real estate, equipment, goods in turnover, etc.) to the bank and undertake to pay, when requested by the bank, the amount of the letter of credit (by reserving the funds on the coverage account) before the settlement under the letter of credit.