Letters of credit: securing your international transactions

Understanding the letter of credit mechanism

How it works

When you use a letter of credit, also known as a documentary credit, you benefit from a bank commitment that guarantees payment for your international transaction. This sophisticated mechanism protects your interests by involving several parties: you, your trading partner, and your respective banks.

The key players in your transaction

To secure your international trade, you need to control the involvement of four main players:

• You, as principal (if you are an importer) or beneficiary (if you are an exporter)
• Your sales partner
• Your bank
• Your partner's bank

The process that protects your interests

Here's how to set up your letter of credit:

1. Negotiate your commercial contract
2. Ask your bank to open a letter of credit
3. Wait for your bank to issue the letter of credit
4. Check the notification to your partner
5. Supervise shipment of merchandise
6. Submit your compliant documents
7. Receive your payment after verification

ℹ️ Imagine that your company imports electronic components from Asia for 250,000 euros. With a letter of credit, you pay only on receipt of the correct documents, while your supplier is assured of payment as soon as the goods are shipped.

The different types of letters of credit available to you

Irrevocable letter of credit

The efficient management of your international transactions requires the right tools. By choosing an irrevocable letter of credit, you obtain the most solid commitment: no modification is possible without the agreement of all parties.

Confirmed letter of credit

For maximum security, opt for a confirmed letter of credit. In this case, you benefit from the additional guarantee of a second bank, generally located in your own country if you are an exporter.

Transferable letter of credit

This option allows you, as the primary beneficiary, to transfer your rights to other beneficiaries. It is particularly useful if you are managing triangular operations.

ℹ️ Take the example of a textile customer who uses a confirmed letter of credit for his purchases in India. This double guarantee enables him to establish a lasting business relationship, even without any prior history.

Strategic advantages for your company

Secure your international payments

By optimizing your financing options, you'll discover that letter of credit offers you unrivalled security. You can confidently expand your international sales network with the help of trusted third parties.

Reduce your business risks

Protect your business against :

• The risk of non-payment
• Political risks
• Exchange rate fluctuations
• Non-conformity of goods

Points of attention for your success

Control document compliance

To optimize your short-term financing solutions, make sure your documents are perfectly compliant:

• Your commercial invoice
• Your shipping documents
• Your certificates of origin
• Your insurance documents
• Any specific documents required

Manage your deadlines efficiently

Plan ahead:

• Issuing your letter of credit
• Your shipments
• Presentation of your documents
• Bank verification times

Negotiate the best terms

"Think of your letter of credit as a precise contract: every detail counts towards the success of your transaction", as our experts emphasize.

Control your costs and optimize your management

Structure your costs

To optimize your financing structure, anticipate all costs:

• Your opening commission
• Your modification costs
• Your notification costs
• Your confirmation fee
• Your document processing costs

Optimize your cash flow

Integrate :

• Your payment schedule
• Your banking deadlines
• Your financial costs
• The impact on your WCR

The Karmen solution for your needs

Your modern, flexible financing

We have developed Karmen Loan especially for you. Access loans from €30K to €5M with terms from 1 to 24 months, perfectly adapted to your import-export operations.

Complete your letters of credit

Benefit from the advantages of our solution:

• Maximum flexibility
• Quick decisions
• No complex guarantees
• A 100% digital process

The future of letters of credit

Digitalize your processes

Follow current trends and take advantage of technological advances:

• Automate your checks
• Reduce your lead times
• Increased security
• Total transparency

Adapt to changing market conditions

Prepare for change:

• Integration with your e-commerce
• New digital guarantees
• Innovative hybrid solutions

Conclusion

The letter of credit remains your best ally in securing your international transactions. In a world where trade is becoming increasingly complex, mastering this instrument gives you a decisive advantage.

For success, combine traditional tools such as letters of credit with modern, flexible solutions. This approach will enable you to optimize your cash flow while securing your international operations. Contact us to find out how Karmen can help you.

‍