The True Costs Behind of Letters of Credit

Hidden-Cost-Puzzle-2Letters of Credit are a tried and true form of payment for international transactions. Importers and exporters who are completely new to one another, or simply do not have the open credit lines needed, can go to their financial institution of choice and walk out with a certified letter acknowledging that they have the full faith of the bank in covering the cost of the invoice. While Letters of Credit served businesses well in the past, the speed with which international commerce takes place has outpaced that of financial institutions. While useful, Letters of Credit have become a hassle.

Additional Cost
Letters of credit can be costly. For those conducting frequent business that requires the use of LOCs can soon find that setup fees and surcharges can quickly add up to thousands of dollars each month. Most financial institutions will have a setup fee of between $150 and $250, but the fees don’t stop there. Frequently paid for by the buyer, most banks will charge another fee of 1-2% of the total transaction amount. So, for a $100,000 Letter of Credit, buyers are looking at between $1,150 and $2,250 in total fees.

Time is Money
Ask anyone who is responsible for running a business and they’ll most likely tell you that the one thing they wish they had more of is time. Delays cost money and any time anyone has to wait before collecting on an invoice is money delayed for paychecks, new equipment and other purchases. Letters of Credit can end up costing you time depending on how quickly the two banks and businesses involved provide any necessary paperwork. Missing documents can delay the release of payment by days, weeks, or – in worst case scenarios – even months if the issuing and disbursing banks cannot get on the same page when it comes to document verification.

Negotiation as to the terms of the LOC can also lead to costly delays. Disagreements over jurisdiction of dispute, windows of acceptance of shipments, required proof of shipment, or even the spotted currency conversion rate can suck up much needed time and resources for both businesses.

Regardless of which payment method you choose, it’s important to know all the costs and potential pitfalls before you commit one way or another. Each payment process can vary widely in its terms, fees and dispute processes. Click for more information about how PaySAFE can help your business with international payments or to read more about how you can guarantee payment as a small business exporter.

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One comment

  1. […] If you’re looking for more helpful tips when it comes to business escrow see our posts on the true costs behind letters of credit, international buying and selling, and what Alibaba’s recent IPO means for […]

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