This is a form of short-term borrowing often used to improve a company's working capital and cash flow position. It allows a business to draw money against its receivables before the receipt of actual payment.
The business borrows a percentage of the value of its sales invoices (discount factor) from the Bank, effectively using the receivables due as collateral for the borrowing.
Credit risk (the risk of default) is on the supplier.
This is a funding method that allows a customer to purchase to access funding on the basis of a confirmed purchase order
The facility is available to customers who normally trade with reputable companies and with good credit rating.
Proceeds from this facility are released directly to the supplier of goods or services being financed. The client is then expected to perform on the contract with proceeds from the contract being assigned to the Bank.
Due to performance risk issues associated with contracts, the facility usually calls for some level of collateral.
Main Parties |
Other Paties |
|---|---|
| Applicants | This is the party on whose request the credit issued. |
| Beneficiary | This is the party on whose favour a credit is issued |
| Issuing/ Opening Bank | The bank that issues the letter of credit |
| Advising Bank | The bank that advises the beneficiary of the issues letter of credit |
| Confirming Bank | Bank, which under instructions from the issuing bank assmes the issuing bank's commitment to pay under the letter of credit. |
| Nomiated Bank | This is the bank with chich the credit is available or any bank in the case of a credit availble with any bank. |
The collection by banks, of a sum of money, on behalf of an exporter (the Principal), due from an importer (the Drawee), Subject to ICC Uniform Rules for Collections, Publication No.522
Release documents only on buyer's payment
Release documents only on buyer's acceptance of attached usance Bill of Exchange