Singapore has been dubbed the merchant ‘port of call’, particularly to traders who surf between western and eastern businesses. In fact, according to a recent study, conducted and published by the World Trade Organization, it was found that the country stands at the 14th position in the list of the largest commodities exporters around the world, and to this effect, the GDP linked to trade has peaked to a whooping ratio of 404.9.
Speaking of trading, the concept of a letter of credit (LC) is a fairly popular in Singapore. Here, any payment to the concerned exporter is assured by the financial institution that handles the buyer’s account. Since it offers a certain ease in operation, it is a much preferred mode of payment amongst trades, especially because the finance is secured prior to the shipment of the goods, and also, the respective buyer in a transition does not need to make the payment until he gets the receipt of the stock load. This has also given rise to various financing options based on the letter of credit.
Advantages of this Option
One of the major advantages is the reduction of the credit risk factor. Usually an import and export trade pertains to a huge geographical gap between the concerned parties. Thus, determining credit worthiness is always an uphill task. A letter of credit eliminates or reduces this risk, especially for large business houses with a voluminous trade operation.
- A major concern of sellers is fraudulent buyers; they withhold payment on the pretext of quality of goods. This documentation helps avoid such disputes, since the terms linked to such business transactions states that any complaint on the quality of goods cannot be used by as an excuse to avoid loan repayment.
- Apart from security of payment, the exporter also has the advantage to fore plan his operations. Owing to the conclusive future cash inflows through the letter of credit, he can plan expansions and other growth in advance, thereby saving considerable time in operations planning.
- Any dispute arising out of such business transactions are settled easily owing to this forethought documentation, since it states guidelines, custom conditions and practices, and also the procedure for documentary credit.
When it comes to securing extra finance, a letter of credit facilitates a pre-shipment finance from the related financial institutions and banks, by the exporter. Since this document is considered as a ‘safe export order’, financial assistance can be acquired with minimum interest.