Letters of credit are the most secure form of payment, after cash-in-advance, for the seller (beneficiary) because they shift payment risk from the buyer (applicant) to their bank (issuing bank). Although buyer risk is mitigated by letters of credit, country risk and bank risk are not. Banks are better equipped to assess those ongoing risks that could emerge during the payment cycle. Fortunately, there is a solution for mitigating these payment risks.
Letter of Credit as a Payment Term
A letter of credit is an essential tool to mitigate risk when buying or selling goods overseas. Country risk, counterparty risk and foreign bank risk, among others, are mounting due to the global pandemic and its economic impacts on foreign transactions.
Importance of Confirmation Today
The beneficiary may have concerns about the political or economic stability of the buyer’s country, or the strength and reputation of the issuing bank. A confirmed letter of credit protects the seller by further shifting these risks to the confirming bank. With market volatility being at an all-time high, added to the difficulty of evaluating foreign bank risk, confirmation is a best practice for exporters.
What Does Confirmation on a Letter of Credit Do for My Business?
- Risk Mitigation: Confirmation of your letter of credit by PNC provides an additional layer of security. Clients looking to minimize foreign risk should consider the benefits of confirmation. Confirmation can help secure payment in the event the issuing bank fails to do so due to insolvency or an inability to pay due to political events.
- Working Capital: Confirmation can also facilitate early payment of the letter of credit, improving working capital and reducing days sales outstanding (DSO) by asking PNC to discount the proceeds at shipment.
- Increasing Export Sales: Leveraging discounting of confirmed LCs may open more sales opportunities to buyers seeking extended payment terms in countries that have higher interest rates.
How Can I Be Certain That My Letter of Credit Is Confirmed?
Instruct your buyer during contract negotiations to include “Confirm” in the terms of sales under a letter of credit. The buyer should also include this request when submitting their application for LC issuance to their bank. To help verify full protection and eliminate risk, contact your PNC Financial Services Relationship Manager to speak with an International Advisor for more details.