advantages of letters of credit in the calculation of import transactions are underestimated by many Russian companies. Often the matter is that the myths about the complexity of the letters of credit, which does not correspond to reality, and lack of understanding of the financial benefits of this tool, but they can be quite noticeable.
One of the important functions of the credit? protection of the interests of the parties entering into a foreign trade contract, on which we will not stop now. But apart from this letter of credit, there is another, equally important role? be an instrument of international trade finance. What is the mechanism of this operation?
When importing company needs a stay of execution of its obligations under the letter of credit and the issuing bank agrees to it, the payment shall be effected by any of the bank?s own funds? letter of credit issuer, or from funds collected by the issuing bank with a foreign bank.
first version of the importing firm is unprofitable, since entails lending rate of the Russian bank, and this automatically increases the cost of the deal because of the relatively high interest rates in domestic banks. So the second option applies when the Russian issuing bank is a foreign credit institution, ready to make financing a specific transaction at a lower rate. Foreign bank with a bank and the confirming.
letter of credit, which the company-importer does not provide cash cover, is a loan product. Therefore, the company at the opening of the letter of credit, banks will impose the same requirements as when applying for a conventional loan. Organizations need to provide bank documents confirming the financial condition and collateral as security. With the letter of credit can be financed as a regular supply of ( in the line of credit) and one-time foreign trade transactions.
Understanding of what constitutes the cost of credit will be easier to imagine the benefits of its use to finance imports. The ultimate value of credits in different banks may vary, as it is affected by many factors. But the pricing algorithm in this area are mainly the same.
The cost of the letter of credit is the cost of confirmation and the cost of funding provided. Sometimes there are additional expenses, depending on the specific rates of the issuing bank, but their value is not more than 1% per annum.
cost of confirmation, in turn, includes a bid confirming bank and the margin of the issuing bank. Calculate it as a percentage per annum. At its magnitude is influenced by several conditions: it is the state of the economy of the confirming bank and credit policy of the foreign bank, and the risk of confirmation, depending on the issuing bank and its country. But as a rule, the value of the confirming bank rate ranges from 1.5 to 4.25% for medium-sized Russian banks for the entire term of the credit ( one year), but sometimes this period can be reduced.
cost of financing consists of a bank?s margin? the issuer?s credit, the rate LIBOR / EURIBOR rates and foreign bank financing the deal. Calculate it as a percentage per annum. For many Russian banks borrow from foreign credit institutions can do in the LIBOR / EURIBOR plus 3-4.5% per annum for the duration of funding. Russian issuing bank determines the value of its margin, considering the subject of each client. This takes into account the stability of the financial situation of the importing firm, the type and quality of collateral, and the average monthly balances with the issuing bank.
The above rates are taken each in its own time and in the end not cumulative, but the total cost of confirmation of funding and shall not exceed the cost of conventional loans in Russian banks, as it will no longer be economically viable. If the cost of such letter of credit equal to the cost of conventional loans, the credit, of course, use a more advantageous from the standpoint of security guarantees for payment and compliance with the terms of delivery.
Today, a letter of credit with post-financing is one of the most common types of documentary tools, so as an importer receives many benefits by using it to finance its international trade activities.
should be noted that in the highly competitive international markets, the practice is widely distributed trade credit, deferred payment when he gives a supplier. Getting the post-financing, along with deferred payment does foreign trade is even more economically attractive.
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