What is discounting of lc
So in the case of default by the buyer, the bank will clear the dues of the seller. Now the exporter submits the export documents to the bank. Bank forwards these documents to the issuing bank or confirming bank. The LC issuing bank or confirming bank checks the authenticity of the document submitted by verifying all documents with the originals.
Once the documents are verified, they communicate back their acceptance of bill under LC to the bank. Now if the seller wants immediate payment and the buyer is willing to have a longer credit period, the bank pays the seller the entire amount of bill after deducting the discount. Globalization has given a boost to imports and exports. A lot of people who are into import and export need discounting of the letter of credit on a day-to-day basis, for which they approach the banks.
Banks fix a threshold limit for discounting the LC bill for a given period. Below mentioned is the process that a company has to follow for applying to the bank for LC Bill discounting limit:. Thought letter of credit discounting has some disadvantages, it is a very useful financial service offered by banks which facilitate smooth operations in international trade.
He is passionate about keeping and making things simple and easy. The bank may approve discounting as they normally keep the LC as collateral. The issuing bank of the buyer or an intermediary financial institution may also work as advisors on the original documentary credit. The delayed payment risk for the bank is covered by additional interest and service charges. However, presenting an LC does not qualify for a discounting facility in itself.
Buyers can issue one of several types of documentary credit in favor of the seller. Often buyers attach covenants with LCs that delay the payment for sellers. The delayed payments can cause severe cash crunches for the sellers. One way of reducing the cash problem is to utilize discounting of letters of credit.
A buyer issues a commercial LC in favor of the seller normally. Fundamentally, it is a guarantee provided by a financial institution to pay sellers on behalf of buyers in case of default on their part.
Letter of Credit discounting serves as financial security for businesses involved in either export or import or both. LC discounting is considered to be a typical funding option as financial institutions follow a mandatory verification process to confirm the authenticity of both the parties.
Also, the chance of manipulating the discounting rate is minimal as only the prevailing rates apply to a Letter of Credit. It is considered to be an uncommon Letter of Credit as it can be changed or cancelled by a banking institution at any time and for any reason. It cannot be transferred to a third party. This Letter of Credit can only be changed or cancelled if all concerned parties agree to it. Typically, an irrevocable Letter of Credit is considered to be more secure than revocable ones.
A transferable Letter of Credit can be transferred from one beneficiary to another. Such an LC is used when intermediaries partake in a transaction.
When an advising financial institution trusted by the seller guarantees payment from the buyer, a Letter of Credit is confirmed. A confirmed irrevocable Letter of Credit is more secure than the unconfirmed ones as it is backed and guaranteed by both the issuing and confirming bank.
In the case when a letter of credit reaches the beneficiary with only the issuing bank's payment undertaking, without any confirmation added by another financial institution is known as an unconfirmed letter of credit. The pointers mentioned below offer a fair idea about how an LC discounting works —. LC discounting services in India provide quick and assured access to funding in times of need, making it a preferred financial tool among business entities.
Though there are several benefits of LC discounting, exporters need to become familiar with its limitations as well. If they do not find LC discounting a feasible option, they may consider alternative funding options to keep their operations active until the importer pays off.
The table below highlights the significant differences between LC discount and bill discount. It is a financing process wherein, a lender purchases the bills or documents of export and pays the amount after deducting the applicable LC discounting charges. It is a financial facility which enables businesses to leverage their accounts receivable to avail a loan. In case of default or immediate funding requirement, exporters can use LC to receive payment for the goods sold.