Advantages of Letter of Credit for Small Businesses

Advantages of Letter of Credit for Small Businesses

For almost all businesses, the biggest worry on the horizon is the realization of payment or completion of shipment. While buyers feel prone to fraud and scams when making a decision of advance payment, the suppliers feel the payment recovery post shipment is an unsafe place to be in.

And as a result, prospective deals fall through, professional relationships never culminate and businesses fail to meet their real potential.

For MSMEs hoping to venture into international trade, the fear of payment default is more than just a fear; it is a roadblock against which there is very difficult and sometimes impossible recovery, especially since the success of the first few shipments determines the survival of the small business.

Things, however, are changing.

No longer is someone’s word of promise the factor on which deals move forward. Businesses are learning ways to mitigate losses and manage risks more efficiently. When it comes to payment terms, both parties feel only a few reliable options exist and out of those the number one preference for all businesses is the Letter of Credit.

A letter of credit is a document issued by the buyer/importer’s bank as a guarantee that the exporter shall receive timely and complete payment for the shipment received. Banks usually issue an LC against cash or other securities.

So let’s find out how the Letter of Credit ensures risk mitigation and helps in the faster and more solid growth of any business, especially small businesses.

Consistent shipment and order fulfillment – Businesses with limited financial back up need faster payment to invest in the next order fulfillment and it is both imperative and crucial that the timely payment is realized for an exporter to grow his business. With the bank’s assurance, uninterrupted flow of cash to meet expenses becomes easier with one worry eliminated from the scenario.

Customizable LCs – Numerous versions of customizable Letters of Credit ensure that as per the needs and abilities of both supplier and buyer, the payment is released. In case of Usance Letter of Credit, a time period ranging from 30 to 90 days is agreed upon during which the payment must be made by the buyer. The Sight letter of credit states the immediate payment should be made as soon as the shipment has been received by the buyer/importer.  A Stand-by LC states that the bank will take complete responsibility of the payment in case the bank’s client or buyer defaults in payment.

Reduced Risk & Payment Guarantee – Even if the buyer has managed to prove solvency and is unable to make payment, the guarantee that bank provides in payment realization helps the Letter of Credit the preferred choice of payment terms for all exporters and importers.

And best of all, a Letter of Credit is relatively easier to secure for all genuine businesses hoping to take the right route to success.

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