Alternatives to Letters of Credit

Letters of credit are an age-old way of conducting business. While letters of credit were necessary for transactions for many years, they are now becoming a thing of the past. Today, there are alternatives to letters of credit that are frequently being used to complete transactions. You can learn more about these alternatives to letters of credit from international trade finance companies like Tradewind.

In recent years, because of technology and advanced methods, businesses have moved away from the traditional methods of transferring funds and toward the use of modernized alternatives. According to the International Chamber of Commerce, the latest figures indicate that 41% of the export trade finance products that financial institutions handle today are letters of credit, which reflects a decline of 3% in three years. Import trade finance operations have seen a greater decline in letters of credit, with an 8% decrease in handling letters of credit between 2011 and 2013. While letters of credit are still commonly used, providers of ePayment services are changing how the process works for both suppliers and buyers.

Purchase Order Financing

One alternative to a letter of credit is purchase order (PO) financing. While on the surface PO financing is much like a letter of credit, there are differences. PO financing is usually based on your ultimate customer’s creditworthiness, so it can often be easier to arrange for a company that doesn’t have a well-established or great credit history. But, if the business owner is willing to step outside the box, the situation with their supplier could be used as an advantage. Wholesalers, for instance, can work with a trade finance company, who could advance funds to their supplier, either through a partial or full payment. This ensures that businesses can fill orders for their customers, who, in turn, can deliver their goods on time. In effect, PO financing allows companies to keep up with orders, especially large ones or those placed during times of high seasonal growth, and maintain existing business, as well as accept new business opportunities.

Unlike a bank loan, PO financing does not involve repayment. The end customer submits payment to the trade finance company after they have received the goods, and the financing company then pays the wholesaler or other client type. PO financing can also be used for import deals without your business suffering the risk of non-payment, as the finance company or bank absorbs this risk in the case of buyer insolvency. If your ledger has outstanding invoices, or if you have an invoice pending for a new customer, you could use it to access funding that will help you unlock a big deal, so your company can grow and achieve more without having to sacrifice all your available funds.

Digital Payment Providers

Because of financial operations offering foreign exchange payments digitally, businesses can eliminate the transfer fees charged by banks. Often, those fees reduce the savings that suppliers might use to offer buyers discounts for early payments. Currency transfer service providers can also be beneficial when outbound payments are involved. These companies know how to efficiently handle payments for orders that weren’t expected or for payments that are time-sensitive. This will allow buyers to take advantage of the discounts available for early payments to suppliers more frequently. These companies can also use digital scheduling of payments for recurring and scheduled payments.

Using these services can connect buyers to suppliers in emerging markets. One of those markets is the Asia-Pacific region, which is experiencing some of the most dramatic growth in global trade. In the past, these markets weren’t attainable because of the difficulty of establishing a relationship with a local bank serving that region.  It is also challenging to maintain multiple bank accounts abroad with funds in foreign currencies.

Migrating toward digital payment providers has become a trend in the business world that is empowering buyers and suppliers. It aids in building trust more easily and establishing relationships without needing to enlist the traditional letter of credit that was used for decades in the business world. As more operations shift toward ePayment services, the letter of credit could eventually be phased out completely. With the increased ability to use other alternatives that are more efficient and that speed up the process, businesses can become stronger players in world trade.

Final Thoughts

Businesses no longer must depend on banks for financing to stay competitive in the global marketplace. Instead, they can easily access services from trade finance firms that offer international payments that are processed much more quickly. The modern business world has a demand to do business in a much more efficient and simpler way. Now that receiving and making payments for deals are handled much faster with the advent of new technology,  the old ways of handling such payments are not necessarily the best way any longer.