For Businesses
Technology
Securiy for overseas purchases
Estimated time to read page: 3min 40s | Written - January 2025. Reviewed quarterly.
"Letters of credit simplify complex international transactions, providing suppliers with assurance of payment and buyers with control over goods in transit. While each LoC is unique, they are essential for facilitating global trade, ensuring confidence, and managing risk." - Jamie Davies, Head of Lending
A Letter of Credit (LoC) is a financial instrument issued by a bank or financial institution that ensures a seller receives payment from a buyer, provided specific terms are met. In the event that the buyer is unable to make the payment, the bank/financial institution covers the full or remaining amount of the purchase.
It’s widely used in domestic and international trade to mitigate risks for both parties, as it significantly reduces risk for both buyers and sellers in international trade transactions. Letters of Credit offer flexibility as they can be tailored to meet specific transaction needs and terms. Additionally, they provide a legal assurance framework to handle disputes and claims effectively.
Protect your business transactions with a Letter of Credit – ensuring timely payments and building trust with your trading partners.
The industries that typically apply for asset finance are:
Letters of Credit provide security in trade transactions, ensuring sellers are paid on time while buyers are guaranteed delivery of goods or services as agreed. It is particularly useful in international trade where trust and enforcement mechanisms can be challenging.
There are several types of Letters of Credit. The most common ones are the Documentary Letter of Credit (DLC) and the Standby Letter of Credit (SBLC). The Documentary Letter of Credit is primarily used in trade finance to ensure the payment for goods or services. It operates as a payment mechanism, where the seller is guaranteed payment once specific documents, such as commercial invoices and shipping documents, are presented and verified. This ensures that both parties in a transaction are protected: the seller receives payment, and the buyer only pays once the goods or services have been delivered according to the agreed terms.
On the other hand, the Standby Letter of Credit acts as a secondary or backup guarantee. It is only used if the primary obligation, such as payment or performance, is not fulfilled. The Standby Letter of Credit provides assurance to the beneficiary that payment will be made in the event of a default by the other party. While the Documentary Letter of Credit requires detailed documentation to trigger payment, the Standby Letter of Credit typically only needs a simple demand for payment along with a statement of default.
The key difference is that the Documentary Letter of Credit facilitates trade by ensuring direct payment for transactions, whereas the Standby Letter of Credit serves as a safety net, used only in cases of non-payment or non-performance.
The process begins with the buyer and seller agreeing on a transaction and specifying the terms of the Letter of Credit. The buyer then applies for it with Spark, who connects the buyer with the appropriate Letter of Credit provider.
The provider issues the Letter of Credit and sends it to the seller’s bank. The seller ships the goods and presents the required documents to their bank. The seller's bank verifies the documents and forwards them to the issuing bank.
On top of that, we provide advice and support through the entire process. Arranging a finance facility can take time. We assist you in cutting through the unnecessary and focusing only on what needs to be done.
We make it easier for you to raise commercial finance for your project or business. As we're not tied to specific commercial finance lenders, our concern is what's best for you.
By joining years of expertise with our in-house intelligent lending technology, we are able to quickly match your business to the best product and the right lender for your circumstances, even if you have struggled in the past, in a simple and straightforward way.
The buyer usually pays the issuance fees, but additional costs like confirmation fees may apply to either party, specially if anything in the agreement doesn't meet its requirements.
Yes, amendments can be made but may involve additional charges from the bank.
It typically takes a few days to a week, depending on the bank and complexity of the trade agreement.
No, it’s generally used for transactions with new or international trading partners to ensure security and trust, or in very complex and high-value transaction.
The issuing bank may refuse to honour the LC.
