LETTERS OF CREDIT INSURANCE
To capitalize on the opportunities of doing business globally, both companies and their lenders must be wary of counterparty risk when discussing payment terms. Negotiating between buyers and sellers is often difficult due to a lack of mutual trust: the seller may worry about not receiving payment after investing their working capital, while the buyer may worry about goods not being delivered after making an upfront payment. Therefore, a Letter of Credit is often used as a solution by both parties.
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When using a Letter of Credit as a solution, it is advisable to contemplate insurance as a means of mitigating the following risks:
Wrongful or abusive calling of standby LC by the beneficiary
Non-honoring of Documentary LC by the counterparty bank.
TYPES OF LETTER OF CREDIT INSURANCE
WRONGFUL OR ABUSIVE CALLING OF STANDBY LC
Covers up to 95% of insured losses if a presentation is wrongfully triggered by the beneficiary to your bank (Used by buyers and sellers)
NON-HONORING OF DOCUMENTARY LC
Covers up to 95% of the financial loss if the foreign bank fails to pay you under the terms of the Letter of Credit (Used by Banks)
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KEY FEATURES OF LETTER OF CREDIT INSURANCE
RISKS COVERED
Wrongful call
Abusive and Excessive callÂ
Political Risks
INSTRUMENT COVERED
Irrevocable LC
INSTRUMENTS NOT COVERED
Red Clause LC
Revocable LC
Back to Back LC
Conditional LC
STANDBY LETTERS OF CREDIT
VS
DOCUMENTARY LETTER OF CREDIT
WHAT IS A LETTERÂ OF CREDIT?
Standby Letter of Credit: Is a guarantee issued by a financial institution on behalf of a client to make payment if the client is unable to meet their obligations to the beneficiary.
Documentary Letter of Credit: Is an instrument issued by a bank to another bank (often in a different country) on behalf of a buyer to guarantee payment, subject to specified conditions and shipping documents such as commercial invoice, bill of lading, certificate of origin and import/export license.
WHAT IS THE PURPOSE OF A LETTER OF CREDIT?
Standby Letter of Credit: Provides assurance to the beneficiary for a long-term obligation and used as a second line of collateral in case performance or financial obligations are not met by the applicant.
Documentary Letter of Credit: Provides payment security for international sale agreement.
WHEN TO USE A LETTER OF CREDIT?
Standby Letter of Credit: Used in domestic and international transactions.
Documentary Letter of Credit: Used in international transactions where the buyer and the seller are still working on establishing a strong relationship.
WHAT ARE THE FEATURES OF A LETTERÂ OF CREDIT?
Standby Letter of Credit: It is not a payment tool but a guarantee of performance. Often used to eliminate cash deposits.
Documentary Letter of Credit: It is a payment tool. A presentation of compliant documents showing evidence of shipment of goods is required in order to receive payment.
WHAT IS THE DURATION OF A LETTER OF CREDIT?
Standby Letter of Credit: Long term instrument with a validity of one year and renewable.
Documentary Letter of Credit: Short term instrument that usually expires within a few months.
WHO ARE THE PARTIES TO A LETTER OF CREDIT DEAL?
Standby Letter of Credit: The Applicant, the issuing Bank and the Beneficiary (The Beneficiary bank is included for SWIFT transactions).
Documentary Letter of Credit: The Applicant, the Issuing Bank, the Advising Bank, the Confirming Bank (if any) and the Beneficiary.
IS A LETTER OF CREDIT SUBJECT TO ANY INTERNATIONAL RULES?
Standby Letter of Credit: ISP - International Standby Practices
Documentary Letter of Credit: UCP - Uniform Custom and Practice
Demand guarantees are subject to URDG: Uniform Rules for Demand Guarantees
HOW CAN YOU TERMINATE A LETTER OF CREDIT?
Standby Letter of Credit: Is typically an irrevocable bank instrument that cannot be revoked or modified without the written consent of the parties.
Documentary Letter of Credit: Is typically an irrevocable bank instrument that cannot be revoked or modified without the written consent of the parties.
HOW CAN WE HELP?
Our value proposition is centered around providing tailored insurance solutions that protect our clients' businesses against potential risks and financial loss. Our combined expertise in trade insurance and financing sets us apart, and we are committed to providing the peace of mind that comes with knowing your business is protected and financially supported.