A Letter of Credit is widely acknowledged as being the most reassuring guarantee of payment in international commercial transactions.
Commonly referred to as an LC, it ensures the settlement and successful completion of a commercial contract between an importer/buyer and an exporter/seller by the bond of their respective banks.
So, how can a credit insurance policy be an interesting alternative to a Letter of Credit today?
As a result of frequent questions from companies who have regularly used this type of payment security, we have carried out some research among our clients regarding their view of a Letter of Credit.
Overall we came to the same conclusions and noted similar drawbacks.
Most agree that Letters of Credit are a secure solution (compensation in full, without delay). However:
- There are some constraints: a Letter of Credit can complicated and take a long time to implement; completing the paperwork can be very time-consuming, attention to exact detail is essential and it can be costly.
- There are some concerns: whether the issuing bank confirms the Letter of Credit or not (buyer’s bank) is a real problem, especially when dealing with countries experiencing political instability.
Based on this evidence, it has been possible for us to demonstrate that credit insurance policies that are properly structured can provide far more flexibility at significantly lower pricing.