If you're an importer and your overseas supplier wants a huge deposit before they'll supply the goods, what do you do? Consider a letter of credit.
If you haven't worked with a supplier before, they'll generally want a significant deposit before they'll start work or send any goods - particularly if they're overseas. This is understandable, but it creates real cash flow problems for most importers. In these situations, a letter of credit is an option.
A letter of credit is a document that guarantees payment by the Lender to a third party if certain conditions are met. Importantly, it's a way of dealing with your supplier's demands without having to part with any cash up front. Here's how a letter of credit works:
Letters of credit can improve your cash flow. However, they can be expensive and they are a specialist area. Get the foreign exchange arrangements or loan conditions wrong, and it could cost you big time. You need to talk to a business finance professional. To learn more about letters of credit, talk to an MFAA member today.