July 2020 – The economy is slowly but steadily beginning to pick up speed again. However, once the first major wave of the coronavirus pandemic has been overcome, global trade will be completely different to how it was before: It will be more fraught with risk and yet more risk-conscious at the same time. German importers in particular want to take even fewer chances in the future. The necessary means to achieve this were invented a long time ago: documentary payments with collection and letters of credit. Payment transactions are a specialist area, and the experts at Hamburg Commercial Bank are familiar with every detail.
"Out of this nettle, danger, we pluck this flower, safety." William Shakespeare's witty saying is still relevant four centuries later – if not more relevant than ever. Fortunately, after the shock metered out by the first wave of the coronavirus, there are increasing signs of a recovery in the global economy. The pandemic is far from over, however, and the potential for a relapse in infections and economic setbacks is high. Many German entrepreneurs are anxiously asking: "How do I trade in these uncertain times?" Medium-sized companies in particular are tightly bound to the rest of the European economy, while also having close ties to foreign economies with different monetary and legal areas. "Trading will be different after the coronavirus pandemic," says Andreas Beckmann, Department Director and Team Head of Trade Finance at Hamburg Commercial Bank. "However, the tools that can protect importers in particular against increasing deposit, currency, transport, delivery or quality risks have been around for a long time and are already tried and tested."
Hamburg Commercial Bank's number one specialty is documentary payments in foreign trade business. Many commercial client segments, be it international fashion chains, medium-sized dropshipping companies or project developers, have been protecting their cross-border transactions and relying on the knowledge of Hamburg Commercial Bank's expert team for many years now.
Around 80 percent of world trade is processed using non-documentary payments. Non-documentary payments are especially prevalent in service and capital transactions. "However, this form of trade requires there to be a high degree of trust between the contracting parties. We only recommend it for long-term business relationships," says Beckmann. He advises more caution and hence documentary payments – especially in view of the coronavirus pandemic, which has now spread to all continents. This is where documentary collection and documentary letters of credit come in: "Documentary collection is recommended if the business partners already know each other and agree to carry out subsequent transactions. If no relationship of trust exists between a German importer and a foreign supplier, there should always be a letter of credit when carrying out the first transaction," explains the trade finance expert. Prudent importers should also use documentary letters of credit when trading with trusted partners from countries where political, economic and legal conditions are highly unstable.
Documentary collection is a classic transaction requiring simultaneous performance: The amount owed by the buyer is collected by a bank (the "collection") in exchange for the delivery of certain documents. The importer can thus be sure that they will receive the agreed title documents for their money – and the foreign seller in turn has a guarantee that they will receive remuneration for their products. To go into detail, collection involves two sub-types: Documents against payment, where the exporter does not grant a payment term, and documents against acceptance, where they do.
According to Beckmann, a letter of credit is an "abstract and conditional promise to pay a beneficiary made by the importer's credit institution." Legally speaking, letters of credit are completely detached from the actual purchase contract or underlying transaction. Banks such as Hamburg Commercial Bank only deal with the documents relating to the goods, but not with the actual goods.
The letter of credit is used in all transactions that are carried out on a regular basis. This is the key difference from the (foreign) guarantee: This is only paid by the bank in the event of a guarantee claim, and the transaction may have failed for various reasons. In contrast to letters of credit, the legal framework for guarantees is more diverse: Guarantees are generally governed by the law of the country in which the issuing bank resides, unless an explicit place of jurisdiction has been specified. The framework for documentary letters of credit, on the other hand, is clearly laid down and subject to the Uniform Customs and Practice for Documentary Credits (UCP).
This globally recognized basis allows letters of credit to be used immediately if necessary: Traders in particular react directly to the smallest changes in the market and take action. "Thanks to our optimized processing flow, we can help clients to open letters of credit for import within the hour," says Andreas Beckmann. Even for more time-consuming process steps in letter of credit transactions, such as document checking, the established KPIs show a maximum processing time of 48 hours from receipt of the client's order to execution by Hamburg Commercial Bank's Trade Finance team. "Speed, reliability, a high degree of process security and in-depth technical understanding are our trump cards in international trading business," says Beckmann. The bank's trade finance experts work closely with the Corporate Client division's relationship managers to implement the best solution for joint clients in times of new beginnings. Or, to quote Shakespeare: "Courage mounteth with occasion."