Letters of Credit are a very important payment and hedging instrument in foreign business.
Letters of Credit are a globally accepted payment instrument with financing options to minimize risks in foreign business. In case all conditions are met, the bank is obliged to disburse the agreed amount to the beneficiary of the Letter of Credit.
Foreign business is associated with numerous risks, especially for exporters. Exporters run the risk of non-payment by the buyer. Importers, on the other hand, run the risk of not receiving the goods from the supplier for which they have already paid. This is where Letters of Credit can play an important role.
Abstract and irrevocable payment commitment
Prepayment is made by the bank upon presentation of documents complying with the Letter of Credit
Governed by international guidelines ERA 600
Exporter: Bank pays irrespective of buyer's willingness to pay
Importer: Pays only once the agreed documents have been presented in conformity with the Letter of Credit
Retailer: Can use Letters of Credit as basis to finance its purchase
Letters of Credit – different types
Confirmed Letters of Credit
Letters of Credit are usually unconfirmed but can also be confirmed by commercial banks. If they are confirmed, Erste Group undertakes to pay in case the opening bank defaults. In this way the exporter doesn't bear commercial or political risks of the opening bank, because these risks are borne by Erste Group.
If you have questions regarding confirmation fees, please contact us at firstname.lastname@example.org
Discounting Letters of Credit
Receivables under deferred payment Letters of Credit may be advanced by Erste Group. The beneficiary must sell the receivable to Erste Group after presenting the documents complying with the Letters of Credit. Discounting Letters of Credit offer you immediately liquidity and risk minimisation.
Should you have any questions, please contact us at email@example.com.
Transferable Letters of Credit
Under specific circumstances the beneficiary of a Letter of Credit (e.g. retailer) is able to transfer the Letter of Credit (in whole or partially) to the producer or prior supplier.
Back-to-back Letters of Credit
If the exporter needs security vis à vis his own supplier, a Back-to-Back Letter of Credit can be offered. In this case the exporter is the ordering party of the Back-to-Back Letter of Credit. The transaction involves legally two separate Letters of Credit, even though both are linked to each other.
Stand-by Letters of Credit
Is very similar to an abstract guarantee; in case contractual obligations are not fulfilled by the ordering party, the beneficiary is indemnified by the bank. Because it is similar to an abstract guarantee, this special form of a Letter of Credit is usually not utilized.