Risks to beneficiary under Letter of Credit

1.Failure to comply with Letter of credit terms:
Letter of credit is a safeguard for payment to the beneficiary.
The main risk to beneficiary is that the negotiating bank or the issuing bank will refuse payment because the documents do not comply with LC terms. The beneficiary should read the LC carefully and request for amendment if any terms appear conflicting or the beneficiary would find it difficult to satisfy any of those conditions.

2.Failure of payment from issuing bank:
If the LC is irrevocable but unconfirmed the beneficiary faces the risk of issuing bank's failure and country risk related to the country issuing bank belongs to.
To safeguard such a risk, the beneficiary can obtain confirmation of LC by a bank in its own country.

Trade Finance over the years

Trade finance has been in existence since time immemorial. If you were to search for word trade finance on internet,it is interesting to note that there is a reference of Trade finance found in ancient texts of Mesopotamia and is also mentioned in the Silk route-China.

Over the years trade finance has evolved much more than just buying and selling of goods , in to a globally viable business model, where the banks and financial institution offer trade finance models tailored according to the business requirement of importer/exporter. Today we have Post/pre Shipment finance, Forfaiting, Structured Trade Finance, Commodities trade finance and Islamic Trade Finance and to mitigate risk there is Export Credit Insurance, Export Credit Guarantee.It is under the process of constant evolution. With the advent of technology, there is a need to eliminate the structural and physical barriers between Banks and customers and move towards an integrated and faster system whereby all the parties involved are linked electronically, eliminating paper and bringing in electronic documents.

Introduction

Trade Finance mainly involves import and export of goods and services. Buyer is the importer and Seller is the exporter in International Trade Finance. Business between importers and exporters from different countries can be very complicated and risky. Understanding Trade finance can help to bridge the problems faced in world business.

Trade Finance enables emerging businesses to gain access to financial resources and provides companies with necessary capital and liquidity allowing them to expand and grow.

Depending on the negotiating power and stage of trade relationship of the parties involved, the trade transaction is designed.

1.If the exporter has high bargaining power then he would demand an advance payment

2.If the importer has high bargaining power then he would prefer payment after delivery of goods

3.If the importer and exporter are not known to each other and enter into a trade transaction, then the best possible trade tool is Letter of Credit.

4.If the importer and exporter are well known to each other and they trade regularly, the exporter could send bills on collection through his bankers to importer’s bankers. However, even under this situation a Letter of Credit would be an ideal trade tool.