Letters of Credit (L/Cs)
A Letter of Credit (also knownas a Documentary Credit ) is a bank-to-bank commitment of payment in favor of an exporter (the Beneficiary), guaranteeing that payment will be made against certain documents that, on presentation, are found to be in compliance with terms set by the buyer (the Applicant).

Like Bills for Collections, Letters of Credit are governed by a set of rules from the ICC. In this case, the document is called; "Uniform Customs and Practice" and the latest version is document number 600. In short, it is known as UCP600 and, again, over 90% of the world's banks adhere to this document.

Irrevocable: The terms and conditions within a L/C cannot be changed without the express agreement of the Beneficiary. Under UCP600, revocable L/Cs are no longer acceptable under any circumstances.

Unconfirmed: The payment commitment within the L/C is provided by the Applicant's issuing bank.

Confirmed: If an exporter has any concerns about the circumstances which may prevent payment being made from either the Issuing Bank or buyer's Country, the adding of "Confirmation" moves the bank/country risk issues to the bank which adds its confirmation (the confirming or advising bank) and notifies the DC to the exporter. The price of such a confirmation will obviously depend upon the level of perceived risks to be covered. Banks can often provide indicative pricing for confirmations prior to the arrival of the DC, so that costs can be estimated.

Procedures
The exporter and buyer can agree detailed terms, as part of the commercial contract. This can include exactly what documents need to be produced and precisely what detail such documents should quote. Letters of Credit, as well as offering a bank's commitment to pay, also offer benefits in terms of finance. Speak to your bank, or the Advising/Confirming Bank to see how they can help. Additionally, commercial insurers now offer an insurance-backed product that covers the same basic risks as confirmations. Please speak to your insurer for details.

Standby Letters of Credit (SBLCs) or Bank Guarantees
SBLCs are similar to Bank Guarantees, in that they sit behind a transaction and are only called upon if the buyer fails to pay in the normal course of business (which is often Open Account). They can be particularly useful to cover an underlying financial risk where multiple payments are to be made, possibly as part of an agreed schedule. However, they do not offer the documentary control of Letters of Credit to buyers and, as such they are an unconditional guarantee.

Other International Trade Risks
Customer Risks
Can they / will they pay? Exporters should find out everything they can about their buyers. Banks can help by contacting the buyer's bank for a reference. There are many commercial organizations that can provide credit information at relatively little cost. Does the exporter have any local contacts or agents who might be prepared to find out what they can?
On the basis of the above information, the exporter can start to think about his stance in terms of the payment risk ladder (above).

Country Risks
Key issues include:
Economic, financial and political stability - at a national as well as financial institutional level;
Foreign Exchange availability and volatility - an exporter's UK bank should be able to assist
Import restrictions/tariffs - Are there any?
If the country has a habit of changing rules regularly or quickly?

Main Types of Money Transfers
SWIFT Inter-Bank Transfer - now firmly established as standard practice in the major trading nations. The buyer will instruct their bank to make payment to any bank account specified by the exporter. It is good practice, therefore, for the exporter to include their account details on their invoice heads.

Buyer's Cheque - an unsatisfactory method of settlement for the exporter as it carries the risk of dishonor upon presentation as well as the added inconvenience of being slow to clear. There is also the very real danger of the cheque being lost in transit as well. A cheque is also unsatisfactory if it is in the currency of the buyer, as this will take longer to clear and will involve additional bank charges. Exporters should only use this method if they have an established trading history with their customer or in cases where the profit margin has been increased to offset cash flow problems anticipated by the delay in receiving payment.

Banker's Draft - this is arranged by the buyer who asks their bank to raise a draft on its corresponding bank in the exporter's country. Provides additional security to a buyer's cheque, but they can be costly to arrange and they do run the risk of getting lost in transit.

International Money Orders - these are similar in nature to postal orders. They are pre-printed therefore cheaper to obtain than a Banker's Draft, although again there is the risk of loss in transit.