Confirmed Export Documentary Letter of Credit
When you are unable to assess the issuing bank or country risk, a Confirmed Export Documentary Letter of Credit (L/C) provides the security of knowing that your payment can be guaranteed.
How does a bank confirmation work?
If your buyer is prepared to provide an Export Letter of Credit (L/C) but you are unable to assess the issuing bank or country risk yourself, Arab Bank Australia may be able to arrange “Confirmation” of the credit.
Providing that all documents presented conform to the L/C you receive a guarantee of payment from Arab Bank Australia should there be problems with the issuing bank of the overseas country preventing payment.
Confirmation is only available if the issuing bank agrees to it. We recommend that you discuss any proposals with your Relationship Manager, Trade Finance as early as possible and include your requirements for a “Confirmed” Export Letter of Credit in your contract as the payment method. Terms and Confirmation requests will then be decided on a case-by-case basis.
- Peace of mind. Normally your company remains liable for any risks associated with the issuing bank, the payment transfer and the overseas country risk. A bank confirmation passes these risks on to Arab Bank Australia.
- Access to working capital. You have the option of receiving the payment in advance of the due date through non-recourse discounting of the receivable.
- Expanding your business. Confirmations can make it more feasible to expand your business into regions where risks associated with the issuing bank or countries are difficult for you to measure and accept.
How a Confirmed Documentary Letter of Credit (L/C) could save you thousands of dollars
As an example, imagine you grant your buyer 120 days credit calculated from the bill of lading date. The value of the order was USD $250,000 and the goods were shipped on 01 January. The payment from your buyer is therefore due on 01 May. However, if the payment was not received until 30 June, 60 days late, your account could have been overdrawn by this amount for 60 days at an interest rate of say 15% p.a. The delay in payment would have cost you USD $6,250.
If you had arranged a Confirmed L/C through Arab Bank Australia the following costs would have applied:
|Confirmation Fee @ say 1.25% p.a. for 120 days *||USD $1,042|
|Negotiation Fee @ 0.25%||USD $625|
|Total Confirmed L/C cost to you||USD $1,667|
|You Save||USD $4,583|
|*Confirmation fee will vary depending on issuing bank, country and tenor.|
- This example has not taken into account the additional costs, time and trauma involved in chasing the debt.
- Also, if you have sold the foreign currency receivable on a forward basis to your bank for the original due date, you may have incurred further cost in canceling or rearranging the Forward Exchange Contract.
- There is of course another possibility. If your buyer had not paid at all, you would have lost the entire USD $250, 000. It could be more than your business could stand and it’s a risk you do not have to endure.
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