Letters of Credit for Business Expansion

Letters of credit are often the key to success in international transactions. So it's surprising to see how many businessmen and, surprisingly, banks in the United States are unfamiliar or uncomfortable handling letters of credit. There may be a tendency to assume that the United States economy is so large that one does not need…

Letters of credit are often the key to success in international transactions. So it's surprising to see how many businessmen and, surprisingly, banks in the United States are unfamiliar or uncomfortable handling letters of credit. There may be a tendency to assume that the United States economy is so large that one does not need to think about cross-border transactions. But if you're running a business, the moment you realize there are six billion people out there who want to buy and sell stuff, it looks silly not to join the party.

The documentary letter of credit serves one primary purpose: it is a payment mechanism which minimizes the chance that one or both parties in an import / export transaction will get ripped off.

We occasionally hear from companies who refuse to accept incoming letters of credit from overseas. Sometimes it's because something did not go well in a previous transaction; sometimes it's because of fear of the unknown, and local people are suspicious about what these foreigners are likely to be trying to do. And they turn down profitable pieces of business.

It's true that LC's are a bit more complex than a simple wire transfer. It's also true that that a business gets paid well for the time it takes to figure these things out, if it can expand its markets dramatically and ensure that it gets paid when selling overseas.

If you're an importer, you probably already know that many overseas suppliers accept letters of credit. You may also know that it's not always so easy to get a letter of credit open at your local bank, either because of their capabilities, or because of your credit limits. Nonetheless, there are private investors who handle this sort of thing, and you just have to know where to look.

If you're an exporter, or thinking about tackling the export market, it's possible to gain comfort in dealing with incoming LC's. Just like in sports or any other endeavor, preparation counts. So much of a successful transaction occurs before the actual deal; if dealing with an incoming letter of credit, the key is preparation and review of the LC in concert with experienced players or finance companies in the field. Once you know what you need, you're well on the way to being able to pay your company's supplier using an incoming letter of credit as collateral.

You do not ask, you do not get. So ask!

In a slowly growing US economy, why not develop markets where wealth is increasing?