Letter of Credit Discounting (LC Discounting) is related to the letters of credit which are available with deferred payment, acceptance or negotiation. At sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that beneficiary’s presentation is complying with the terms and conditions of the L/C Discounting.
Writing letters to credit agency can be very complicated. You may not know what to say, where to send cash, or what to include. But, with a little knowledge you can get powerful results. They essentially serve to notify a seller of goods that a buyer has a line of credit with a credible financial institution. This allows the trader to feel more assured that in the event the buyer is unable to cover the costs of the goods, the seller will still get paid by the bank.
Speed Up Your Cash Flow
The letter of credit discount could benefit your export business in several ways. After receiving an order from an overseas customer, it can take several months to manufacture the goods and get them onto a ship, at which point you could collect on the letter of credit. With the discount, you get most of the money during the production process, funding your operation. Another way to use the discount involves giving your customer an extended term to pay. For example, you may give the customer 90 days after receipt of the goods, so that company has time to resell your products before the foreign bank must make good on the letter of credit. Your bank gives you the discounted advance so your business does not wait three months to get paid.
The Letter Of Credit Discounting should also include the term of the line of credit, whether it is indefinite or whether it will only continue up to a certain expiration date. A provision discussing the automatic extension of the agreement may also be included. Usually the bank will have the option to notify the company in writing that they are electing not to extend or renew the line of credit. In this case, the company will be responsible for paying the amount outstanding on or before the expiration date of the agreement.