Before an export of a particular shipment of goods takes place, a Letter Of Credit is needed. It is a guarantee from the buyer's bank to pay an exporter, through the exporter's bank for goods on behalf of the buyer.
This gives the exporter the assurance that goods will be paid on delivery. It also means the importer does not need to pay for the goods before they have been delivered. As an exporter, you should try not to export your goods without first opening an L/C. A Letter of Credit in Singapore is also used as a convenient means of payment in International trade and opens up other financial facilities such as:
Back to Back Letter of Credit
- An exporter may want to request this from his bank if he has to obtain goods from a third party for export.
- It is opened on the same terms and conditions as the original L/C.
- An importer can get a loan from a bank based on the L/C and the goods the L/C promises he would be getting.
- Funds can be borrowed against the future sale of those goods.
With a L/C, you can get an overdraft or loan for a particular shipment of goods. It can be in the form of:
- Pre-shipment financing - repayment is made when goods are shipped OR
- Post-shipment finance - repayment is made when the buyer has paid for the goods