How to get letters of credit for your small business
How you can get letters of credit for your small business. In order to understand how to get letters of credit, it is necessary to know what they are. A letter of credit is a document that is issued through your bank, which will act as a guarantee of funds to a beneficiary.
The letter of credit acts as the source or repayment of the transaction meaning that the exporter will get paid with the redemption of the letter of credit.
There is a process that you will go through to get the letter of credit. Here are the steps to follow.
1. Go to the bank you plan on working with and request a letter of credit through them for the amount of money you need. $50,000 will likely be enough.
2. Then the bank will need to go through an underwriting process for the letter of credit. Even though the bank is not extending a loan for this amount, the bank is still extending a credit on your behalf. Therefore creating a liability for the bank.
3. If your small business does not qualify for the credit, you may still be able to get the letter of credit if you put collateral up front. These secure CDs are commonly used for the security of a small business.
4. After you have obtained the letter of credit from the bank, there will be a notification completed and sent from the bank to the vendors.
There are different types of letters of credit. Here is a list of those and what each of these is for.
- Revocable letter of credit: This is a letter of credit that can be revoked by the issuing bank without the agreement of the beneficiary.
- Irrevocable letter of credit: This is a letter of credit that cannot be amended, or cancelled with out the agreement of all the parties involved.
- Stand by letter of credit: This letter of credit that is a guarantee for payment. The bank will pay the debt if the customer if they fail to pay the debt.
- Revolving letter of credit: This is a letter of credit that is established where there are regular shipments of the same commodity between supplier and customer. This removes the need for reapplying for additional letters of credit.
There are several banks that you can go through to get a line of credit, if the financial service you are going through cannot accommodate your needs. The best way to find a good institute to meet your needs is to check on the Internet. This is simply done by putting in "Financial institutes" in the search engine.
When you have found the right bank or lending institution, you will want to find out what fees are required in order to process and obtain the letter of credit.
There are conditions that financial intuitions will ask for. Here is a list of some of those conditions.
There may be certificates of inspection needed
Amounts, names, addresses etc
Rules that would apply
Certificates of insurance
In addition to these, each institution has their own requirements for the process of acquiring the letter of credit. However though the process can be hard, remember it is the backing that may be necessary for your business to grow and thrive. This is how to get a letter of credit for your small business.