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
Mark,
ReplyDeleteI am a particular proponent of your recommendation in question 5. A commitment to negotiate is often referred to as a "silent confirmation" because it provides the seller with the same protection as a confirmation, but is based on a bank's nomination to negotiate rather than their nomination to add confirmation and is therefore not expressly communicated to the issuing bank. When I teach people about these in seminars, the common question is, "What does it cost?" Some banks do charge more than they would for regular confirmations, but most charge the same. But the big cost savings comes from being able to shop around. Issuing banks never nominate more than one bank to add confirmation, but they frequently nominate "any bank" to negotiate, thus giving the seller a means to get the equivalent of a confirmation from a bank of their own choosing. The only down side is that the seller must make the arrangements and always pays the commitment/confirmation fee--with a regular confirmation it is at least theoretically possible that the buyer may agree to pay the confirmation fees. Since this almost never happens, the seller is well-advised to find a way to do this business with his own bank rather than paying a fee imposed by a bank that has a monopoly position and does not even consider him a customer.
Buddy Baker
Principal, Global Trade Risk Management Strategies LLC
Manager, Global Trade Solution Delivery, Fifth Third Bank
Thanks Buddy, some great food for thought there.
ReplyDeleteDear all, i really need your help. Let's say confirmation charge is 3.0% per annum and the L/C amount is USD 1.4million issued on 10 Jan 2014 going to expire on 08 March 2014 with deferred payment of 60 days. In that case, according to my calculation it is 117 days from the date of issuance. Can you tell me the simple calculation theory for confirmation charge?
ReplyDeleteAre there any books or manuals for calculation of confirmation charges?
ReplyDelete