When entering a letter of credit agreement, buyers and sellers might overlook certain points that can adversely affect the process and outcome of the transaction. To prevent this, Gulnara Musataeva, Chairman of the Management Board of Nurbank, discussed the necessary nuances to be included in such contracts. She also shared the terms offered by Nurbank for letters of credit and why they are convenient for businesses.
- Gulnara Abaevna, earlier we discussed how a letter of credit works. Let’s discuss what requirements Nurbank places on transaction participants when opening a letter of credit. We assume that credit history plays an important role…
- Often, a letter of credit involves the following parties: the issuing bank, the buyer, the seller, and the seller's bank (advising bank). Banks act as guarantors in this transaction chain, making it crucial for the buyer and seller to be reliable. As documentary credits are considered secured loans, the same conditions apply as in loan issuance, and credit history is also considered.
- How long does the bank need to conclude a letter of credit agreement? Including analyzing the buyer's or seller's documents...
- It's important to distinguish between the buyer-seller contract and the letter of credit agreement between the bank and the client (applicant). Bank staff in charge of trade finance products can draft a contract upon the client's request. This document will outline favorable conditions for the bank’s client, including commissions.
The letter of credit agreement between the bank and the applicant is a fairly quick process using standard contract forms. However, time may be required for document preparation and approvals.
- In one interview, you mentioned any company can use a letter of credit, regardless of the other party's residency. This product is particularly suitable for entrepreneurs involved in foreign trade. Which countries do you cover for such transactions?
- We cooperate with all non-sanctioned countries, allowing entrepreneurs to develop partnerships with companies worldwide and scale their projects.
Nurbank works with various types of letters of credit, both import and export. In the former, the buyer is the applicant, and in the latter, our client could be the seller or a financial institution in a confirmed export letter of credit.
- What essential points should be specified by the buyer and seller in the letter of credit contract?
- To avoid disputes and misunderstandings, it’s crucial to clearly outline all terms. First, the type of credit, which might be confirmed by a first-rate bank, suitable for first-timers to minimize risks.
Secondly, specify the issuing bank, and if needed, the confirming bank. For deliveries in batches, such as flour or metal structures, the contract should mention partial payments.
Other important payment terms include options like “on presentation,” meaning payment upon document verification, or “with deferred payment.”
Another critical contract point is commissions. The document should state the fees payable by each party, typically each covers their bank's costs under standard contract terms.
Standard points include the letter of credit amount, contract currency, validity, document submission deadline post-shipment, last shipment date, etc.
- For what contract amount do you advise opening a letter of credit?
- Letters of credit suit entrepreneurs wary of multiple risks, like non-compliance or credit and commercial risks, making this complex product more costly in fees than loans. We advise evaluating with your manager how beneficial a letter of credit is for each deal, an essential step to understanding if the expenses are justified and if the deal will be profitable.
- What is the market commission range for this product?
- Banks usually charge multiple fees: issuing the credit, amendments, document verification, and so on. Risk fees range from 3% to 4% of the transaction amount.
We hope letters of credit become more in demand as digitalization and electronic money advance, transforming fraudulent schemes. This product, we believe, will help entrepreneurs cover not only cyber but also other risks.