What Is The Opening Of Standby Letter Of Credit Monetization?

A Standby Letter of Credit Monetization is put into operation when a seller and a buyer agree on a series of conditions (shipment method, quality, quantity, payment method, value). But, in order to use this instrument, the buyer must first ask his bank to issue a letter of credit in his favor. This is what is known as the opening of a letter of credit, at which point the bank assumes the responsibility of paying the seller when the conditions of the transaction are met. In turn, the issuing bank notifies the seller's bank that there is a documentary credit of which its client is a beneficiary.

To issue this bank guarantee lease, it is common for financial institutions to require a guarantee of securities or cash as collateral, to which should be added the amount of the fee for the service, which generally corresponds to a percentage of the amount that reflects the letter of credit.

What types of letters of credit exist?

Different types of letters of credit can be posted that can be issued by a bank depending on its requirements and terms.

•    Irrevocable. Most letters of credit have this nature since the agreement established between the parties cannot be modified without the prior consent of all the agents involved.

•    Nominative. Those that expressly indicate which banks are authorized to issue, confirm and negotiate the letter of credit. Otherwise, it is said to be a negotiable letter of credit.

•    Commercial. When the transaction is a local or international purchase and sale operation -import or export-.

•    At sight, by acceptance, or by deferred payment. Depending on its availability, the documentary credit is qualified at sight when the payment is immediate against the presentation of the agreed documentation. On the contrary, it will be by acceptance when the paying bank accepts a bill of exchange issued at a certain term, and deferred payment when the payment takes place within a certain period after the use of the letter of credit (at a certain maturity ).

•    Transferable. In this case, the exporter may transfer all or part of his rights to another party. In this way, you avoid using your own funds to purchase merchandise from your supplier. For this, the transfer must be indicated in the terms of the letter of credit.

•    Standby. Colloquially, it could be said that this type of bank guarantee lease responds to a plan B. It is a kind of bank guarantee used to cover financial obligations due to non-payment. In general, this type of credit expires after twelve months.

The Standby Letter of Credit Monetization, in any of its forms, is a very common resource in international trade. Distances and the existence of cultural or language barriers can negatively affect the trust that develops between the parties and, therefore, this instrument is one of the best insurances that exist in exchanges between actors from different countries, and the one that makes It is possible, in many cases, that the exchanges continue.