|Posted by: John Sung Mar 27 2003, 10:04 AM|
|My company imports consumer electronics from southeast asia. The products are purchased mostly from Mainland China and Korea. Volume has been low “under $200,000”, and the suppliers have been able to work with us by letting us give 50% down at the time of purchase and the rest due 60 days afterwards. However; our main supplier has told me that from now on they will require a letter of credit. How do I go about getting one.|
|Posted by: loanuniverse Mar 27 2003, 09:25 PM|
|I think that the first thing you need to is ask your supplier to tell you what kind of letter of credit he requires of you. It might be that the letter of credit will be specific to each transaction (Commercial) or the supplier wants you to provide them with a letter of credit for a longer period (Standby).|
What is a letter of credit?
A Letter of Credit (LC) is a document issued by your bank that essentially acts as an irrevocable guarantee to pay. This means that if you do not perform your obligations, your bank pays.
Let me give you an example:
You want to buy $50,000 worth of merchandise from one of your suppliers. The supplier agrees to sell the merchandise and gives you 60 days to pay it with the condition that you provide them with a 90 days letter of credit for the full amount. The steps to get the LC would be as follows:
1)You go to your bank and request a $50,000 letter of credit with your vendor as a beneficiary.
2)The bank goes through its underwriting process. Although the bank is not advancing money, they are extending credit on your behalf and are taking on a contingent liability. If your company qualifies from a credit standpoint the LC is issued.
Even if your company does not qualify for credit, you can still get an LC if you are willing to put cash collateral CD secured letters of credit are very common for small business .
If the letter of credit that your vendor requires is not tied to a specific transactions, but they are asking for a guarantee that makes sure that you will not default. They are probably asking for a Stand-By letter of credit. These types of LCs are usually for a longer term. Usually a year and are the vendor’s guarantee that they will get paid.
After you get specifics about the type of LC your vendor requires talk to a loan officer in your bank about the best way to get it done. Most banks, even small ones, have someone that is knowledgeable enough to prepare one. However, the ones that have the most expertise are those that caters to immigrant communities. If I needed to get a LC for a Chinese or Korean vendor, and my bank could not accommodate, I would go to the biggest Chinese or Korean related bank in my city.