Have you ever closely analysed the Letter of Credit tariffs charged by a range of local banks?
Whilst the standard 'transaction' charges (advising, examination, discrepancy fees etc) are fairly consistent, the ways in which Letter of Credit confirmation 'risk' fees are taken can vary greatly between banks.
Questions to consider are:
1. Does the confirming bank charge a minimum fee (eg: £200)?
2. How is the charge calculated? Letter of Credit Confirmation fees are 'market driven' and will depend on the bank's view of the issuing bank and country concerned. The basis for charging will be an annual risk percentage (eg: 2% p.a*), with many banks charging on a 'per quarter or part thereof' basis. Thus if you have a credit valid for 4 months, in our example you would be charged a full two quarters (ie: 1% of the Letter of Credit value). Some banks will be more flexible, offering to charge on a 'monthly basis or part thereof'. In the case of one client, receiving Letters of Credit for values in the multi-millions I even came across a bank willing to charge on a daily basis!
Shop around - it may save you considerable costs!
(*example cost is for illustrative purposes. Fees will vary significantly depending on bank view of risk).
3. Is the confirming bank likely to offer an estimated cost in advance of receipt of the Letter of Credit, thus giving you an opportunity to more accurately factor in the cost into your price?
4. When dealing in more 'difficult' markets, it may prove challenging to find a major bank willing to add confirmation Letter of Credit. This doesn't mean to say that no bank will do so - you may have to lower your sights slightly in terms of the 'grade' of a potential confirming bank, but this may offer you more security than merely relying solely on the strength of the issuing bank / country concerned. We work with associates who may be able to assist with laying off risk to willing banks, so feel free to contact us on 0800 043 4052 or email: info@mjhayward.co.uk for information.
5. As an alternative to 'up-front' confirmation, have you considered requesting an unconfirmed Letter of Credit available with 'any bank by negotiation'? There are major banks out there happy to consider offering a 'Commitment To Negotiate' conforming documents presented under unconfirmed Letters of Credit. This is a great option where credits are advised by a bank that is unacceptable / unfamiliar to you.
Letter of Credit Training for Exporters
