Letters of credit, guarantees and trade finance

Trade finance covers the instruments that let goods move before money does: letters of credit, where the bank undertakes to pay a supplier against compliant documents; bank guarantees, where it undertakes to pay if you default on an obligation; invoice discounting and receivables finance, where it advances against money you are owed. All of them involve the bank taking risk on you or on your counterparty, which makes them credit applications assessed by a credit committee rather than services attached to an account.

The implication is about timing. A new company with three months of banking history will not obtain a letter of credit facility, however good the underlying trade, because there is nothing to assess. Facilities are extended to businesses with audited accounts, a payment record, visible turnover through the account and usually some form of collateral or cash margin. That means the moment to open the conversation is well before the first large order, and the way to prepare for it is to run everything through the account rather than around it — a company whose real turnover is invisible to its bank has no credit story to tell.

What gets asked for

Letter of credit

Bank pays the supplier against compliant documents

Bank guarantee

Bank pays if you fail to perform — common in contracting

Invoice discounting

Advance against receivables, at a discount

Assessment

Credit committee, not account services

Requirements

Audited accounts, turnover history, usually collateral or margin

Timing

Start the conversation months before the need arises

1. Run turnover through the accountA bank can only lend against what it can see. Off-account settlement destroys the credit story.
2. Get audited accounts prepared properlyThey are the primary document in any facility assessment, and a weak audit is worse than a late one.
3. Open the conversation earlyBefore the order, not when the supplier demands a letter of credit next week.
4. Expect collateral or a cash marginFor a first facility this is normal, and it reduces as the record builds.
5. Understand the documentary disciplineLetters of credit pay against documents, not against goods. A discrepancy in the paperwork stops payment even where the shipment is perfect.

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