In today's world, businesses face economic, logistic, and other risks. A shipment worth several million tenge may not reach its destination or may be delivered incomplete. Meanwhile, from the buyer's side, there is a risk of non-payment for the goods. To cover all these risks, both sellers and their partners can use trade finance products, such as a letter of credit. How this form of settlement works and its advantages were explained in an interview with a correspondent of the Kapital.kz Business Information Center by Gulnara Musatayeva, Chairperson of the Board of Nurbank.
- Gulnara Abaeavna, please tell us about the mechanism of the letter of credit...
- In the process of foreign economic activity, many risks arise with direct bank transfer payments that may lead to the non-fulfillment of contractual obligations by the counterparty. These can be country, credit, or commercial risks. All of them can be minimized or eliminated with a documentary letter of credit. This applies to risks on both the buyer and seller’s side. For example, a company sells wheat to Uzbekistan and faces the risk that the buyer may not pay for the goods or delay payment. The buyer, on the other hand, faces the risk that the supply of goods may fail. To prevent this, a letter of credit is used – it is one of the safest forms of non-cash settlements in transactions.
As a result, the seller can cover the risk of non-payment for the shipped goods. Upon receiving a letter of credit in their favor, they have the buyer's bank obligation to pay upon presentation of shipping documents that comply with the letter of credit conditions. Thus, the seller is assured that they will receive payment for their work even if the buyer becomes insolvent for any reason. The buyer's bank is obliged to make the payment for the goods in any case after the seller provides documents confirming shipment of the goods or services.
With a letter of credit, the buyer can prevent the risk of non-delivery of goods or services. Payment for the goods by the bank is made only after receiving documents confirming the shipment of the goods. This is a key condition specified in the letter of credit.
Thus, the bank is a guarantor that the deal goes smoothly. The letter of credit helps prevent fraudulent schemes.
- Which entrepreneurs would be interested in this product?
- This form of settlement is suitable for entrepreneurs who are partnering for the first time. They have not yet tested the reliability of their partner. Any company that sells or buys goods or services can use a letter of credit. The residency of the other party does not matter – it can be another Kazakh organization or a foreign partner. This product is especially suitable for entrepreneurs engaged in foreign trade, where export-import operations are more associated with risks: political, legal, transportation, and financial.
- What types of letters of credit exist and what are their differences?
- There are two types of letters of credit: sight and deferred payment. In the first case, payment by the bank for the goods is made immediately after the seller presents all necessary documents for product delivery. In the second, the payment delay is stipulated in the letter of credit conditions. The number of deferment days usually counts from the date the documents are provided or goods are shipped.
Regarding security, a letter of credit can be covered or uncovered. A covered letter of credit is backed by funds that cover the entire amount specified. When issuing a covered letter of credit, these funds are transferred from the buyer's account to an internal coverage account, from which future payments are made. An uncovered letter of credit is issued under a credit line provided by the bank, and payments are made from the bank’s credit funds. Further settlement between the client and the bank occurs within the framework of the issued loan.
Relating to guarantee security, letters of credit are divided into confirmed and unconfirmed. A confirmed letter of credit provides the seller an additional payment guarantee not only from the issuing bank but also from another bank.
An unconfirmed letter of credit offers the seller only one payment guarantee: from the issuing bank.
- What are the conditions for opening a letter of credit at your bank?
- Our bank actively develops the trade finance business, working with different types of letters of credit – import, export, confirmed, unconfirmed, in various currencies. Contracts can be denominated in tenge, dollars, euros, Chinese yuan, or Arab dirham.
We also finance export letters of credit with discounting and post-financing. This is very convenient and profitable for exporters: they do not need to wait for payment from the buyer; the bank will finance the seller upon providing documents that meet the letter of credit conditions. Nurbank opens letters of credit on favorable terms.
Source: https://kapital.kz/finance/135224/kak-predprinimatelyam-snizit-riski-pri-zaklyuchenii-sdelok.html