The opportunities for MSMEs to expand their business globally and enter the realms of cross border trade are immense. These opportunities have further accelerated with the onset of the digital revolution in the economies across the world. Yet, for MSMEs to engage in cross border trade, they must consider a variety of factors that affect their ability to tap the trade opportunities in foreign markets. These factors include cross border logistics, different political set-ups, non-uniformity of laws in the importers’ and exporters’ country, and doing business with unknown buyers or sellers in foreign markets.
The skepticism surrounding these factors, including the fear of defaulting payments, often act as roadblocks for MSMEs intending to make their business global. Trade finance tools and payment instruments like a Letter of Credit thus become an essential and important aspect for importers and exporters in terms of assurance of payment when dealing with international clients.
A Letter of Credit is a document issued by the importer’s bank as a guarantee that the exporter shall receive timely and complete payments for the goods shipped. Banks usually issue the Letter of Credit documents against a pledge of cash or other securities.
Such trade finance tools, offered by banks with strong international presence like
ICICI Bank, help businesses expand into new markets by presenting them with the chance to both reduce and mitigate the risks involved in cross border shipping of goods, thus enabling seamless business transactions for exporters and importers.
apply for a Letter of Credit online from ICICI Bank easily through its website. To avail the Letter of Credit, all they need to do is create a Fixed Deposit with ICICI Bank and the bank will issue a Letter of Credit for them in return. Alternatively, a Letter of Credit can also be availed against enterprise credit limits. The funding amount is a minimum of Rs million and up to a maximum of Rs million.
Advantages of a Letter of Credit for MSMEs:
There are several advantages of a Letter of Credit for both importers as well as exporters, some of which are as given below:
Helps maintain a continuous supply of goods: A Letter of Credit acts as an assurance for the seller that the buyer will fulfill the payment obligations within the agreed period. Further, it also helps overcome transaction delays. For MSMEs that require various inputs for running their business, having a Letter of Credit in place can help ensure that a continuous supply of goods is not disrupted, as the supplier now has a bank-backed assurance with the issuance of the Letter of Credit. This proves to be even more useful in case of urgent supplies.
Option of customisation: There are different types of Letters of Credit available, such as Sight Letter of Credit, Usance Letter of Credit, Standby Letter of Credit, etc. These different types of Letters of Credit allow the parties involved in a transaction to mutually decide the preferred terms of payment. In the case of the Usance Letter of Credit, days or days is usually allowed for making the payment, whereas in the case of a Sight Letter of Credit, immediate transfer of payment happens upon the shipment/delivery of goods.
Guarantee of payment: A Letter of Credit ensures that the supplier will receive the payment on time. This allows for better management of cash flow for the supplier both in the short term and mid-term.
Reduces the risk of default: A Letter of Credit is a bank-backed document that guarantees transfer of payment to the seller, subject to certain conditions. In case the buyer isn’t able to make the payment, the seller will still get complete payment made by the buyer’s bank for the shipped goods, thus acting as a safety net by reducing the risk of default for the supplier.
The advantages of availing a Letter of Credit are many for businesses engaged in cross-border trade. With a Letter of Credit, businesses involved in the import of goods in retail, wholesale, travel and tourism, service, manufacturing and other categories are able to make easier purchases of goods from international markets, forge great trade relationships with international clients through timely payments and explore new business opportunities by mitigating the risk of default.
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