5 books you need to read to know everything about trade finance & letters of credit.
Transactions are made more efficient, reliable, and transparent via trade finance facilities provided by the banking system around the world. So, trade finance facilities are available to spur economic growth and maintain cash and credit flow within the worldwide financial framework.
Trade finance is needed for a variety of reasons. For instance, to reduce risk, a buyer may want a seller to document the products that have been shipped before paying for them. That’s where a Letter of Credit, one of the most common forms of trade financing, comes in. This guide not only examines trade financing and letters of credit but also lists the best five books on the topic that can help you understand better.
Let’s dig in;
Trade Finance bridges trade cycle funding holes and enables businesses to purchase goods from a supplier without cash upfront. When a Supplier in another country exports goods to a business in another country, they will want a guarantee that payment will be made on time. On the other hand, the buyer will want assurance that the goods will be delivered on time and as agreed.
So, instead of the business owner paying for goods right away, the institution handling their import financing will create a Letter of Credit that will be presented to the Supplier or their finance company. The Letter of Credit serves as an assurance of payment when the terms of the agreement are fulfilled. Payment is made to the seller or their financial institution upon receiving goods.
This arrangement can be used for continuing business partnership between the buyer and the seller or as a one-time purchase of goods.
Letter of Credit in Trade Finance
A Letter of Credit is basically a contractual money transfer guarantee issued by a financial organization on behalf of a buyer for the seller’s benefit that covers the amount indicated in the documentation, payment of which is contingent on the seller fulfilling the credit’s requirements within a particular timeline. This measure’s main objective is to assure both parties that each party’s obligations will be fulfilled in a commercial trade — specifically, the seller’s obligation to deliver the goods as agreed and the buyer’s obligation to pay for those goods within the specified timeframe. Back to back, escalating, revolving, de-escalating, and transferrable clause letters of credit are all variations of the standard Letter of Credit.
To make the payment, the issuer of the letter will use funds from the customer. A Letter of Credit is a common trade finance tool used to ensure that payment or delivery of goods and services is made promptly. The International Chamber of Commerce issues and defines the rules of a Letter of Credit in their Uniform Customs and Practice for Documentary Credits (UCP 600), which traders and producers use worldwide. Both parties use a go-between, such as a financier or a bank, to issue a Letter of Credit and guarantee that the goods received will be paid for.
However, keep in mind that the required documents are usually very detailed and prone to mistakes and anomalies. Also, some buyers or sellers may try to sneak in some unnoticed clauses to ensure they have the final say before or after the payment is made. As such, it is strongly recommended that documents required by a Letter of Credit be prepared by professionals to avoid payment delays, extra fees, scams, and other issues.
Process of getting Letters of Credit
1. The importer and exporter sign a sale contract.
2. The importer applies to their bank for a Letter of Credit.
3. The bank or financier issues the letter of credit and forwards it to the exporter’s (foreign) bank.
4. The LC is authenticated and advised by the foreign bank.
5. The exporter receives the letter of credit and prepares the trade documents. The goods are manufactured once the LC matches the Contract terms of the Sales Contract.
6. The goods are scrutinized before shipment.
7. The goods are delivered to the importer.
8. The exporter delivers Trade Documents to their bank.
9. The Trade Documents are checked for compliance by the Foreign Bank.
10. The foreign bank sends the trade documents to the issuing bank, which also checks the trade documents for compliance.
11. Payment will be distributed among the parties involved if all Terms and Conditions are met.
Reasons to Use an LC with Trade Finance
There are several key reasons why an LC should be used in Trade Finance.
• For starters, trading between countries can be difficult due to various factors such as varying laws, languages, customs, currencies, and so on.
• In general, LCs provide both parties with a more secure payment method.
• Also, the financial institutions involved in the transaction offer their capabilities and knowledge to make sure the process goes smoothly.
The main advantage of using an LC is that it reduces the risk of the buyer missing payments, which is especially important if the seller is uncertain of the purchaser’s credit.
Books that can help you know more about trade finance & letters of credit
1. Understanding Letter of Credit: Learner’s Guide to Letter of Credit by Nisha S Koshal
This book is perfect for people interested in the topic but don’t know much about letter of credit basics or don’t have enough technical knowledge. It could also help bankers and people learn about international trade finance. It will help build a strong foundation that will help them figure out how to handle hard transactions in their everyday lives.
This book is an excellent way to learn about letters of credit and how they work. It quickly walks the reader through the ideas of risk management and explains the basics of international trade finance issues, the problems that global sellers and buyers face, and standard ways for the buyer and seller to make payments and safeguard, respectively.
This is a guide you’ll want to keep close at all times. It is a reference book with definitions, explanations, and the full text of the Uniform Customs and Practices for Documentary Credits, UCP 600, from the International Chamber of Commerce. When a letter of credit is presented, the UCP 600 is the bible for bankers.
4. Understanding Trade Finance by Rupnarayan Bose
This book has questions about international trade, the ICC (Paris) UCP, trade finance, ISBP, the Incoterms 2020 rules, etc. There are also questions about how exchange rates work, foreign exchange work, and cargo insurance. There are descriptive questions, objective multiple-choice questions. and case studies for exercises. All the questions have been carefully selected to help readers learn more about these rules and how to use them in real life.
The Handbook of International Trade and Finance gives a thorough and up-to-date explanation of the key financial areas for anyone who works in international sales, finance, shipping, or administration or is studying international trade for a degree or a job. This important reference book gives you the information you need to minimize risk and boost profitability, find the most competitive financing options, and set up the best payment terms while keeping transaction costs to a minimum.
How can Financely help?
The Financely team works with the top decision-makers at funds, banks, and other types of lenders worldwide to help companies get Letters of Credit. Our team is here to help you grow and take advantage of trade opportunities.
Our job is to help your business find the right trade financing solutions. Find out more about us and how we can help with your Letter of Credit questions here.