Stay liquid the clever way: Purchase financing with import letters of credit

October 2020 – Safeguarding and preserving liquidity should be the number one priority for companies in challenging times like these. Particularly for purchasing companies, import letters of credit are a real alternative to the classic working capital loan. The restructuring of bank loans and overdrafts into accounts payable spares the balance sheet, thus opening up new financing opportunities.

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"Letters of credit are still shrouded in the mist of complexity and the reputation that these financial instruments only make sense in foreign business."

Andreas Beckmann, Team Head Trade Finance at Hamburg Commercial Bank

The name speaks for itself: "working capital" Clever entrepreneurs handle liquidity in the company with care and strategically – particularly in times of crisis like these, prudence is synonymous with a high probability of survival for companies. Classically, German SMEs borrow via working capital from their banks. But in economically demanding times like the current corona economic situation, even the deepest loan wells sometimes run dry.

Against this background, a longstanding, largely underestimated financial instrument has become of great interest: import letters of credit. "Letters of credit are still shrouded in the mist of complexity and the reputation that these financial instruments only make sense in foreign business," according to Andreas Beckmann, Team Head Trade Finance at the Hamburg Commercial Bank (HCOB). But in his words, the opposite is true. "Letters of credit are basically easy to understand. And above all, they are also a financing alternative for companies with many national shopping transactions," the expert explained.

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"Import letters of credit are especially suitable for high frequency purchasers with large volumes."

Gunda Wulf, Expert Trade Finance at Hamburg Commercial Bank

Ideal instrument for regular purchases

"Import letters of credit are especially suitable for high frequency purchasers with large volumes," added Gunda Wulf, trade finance expert in Beckmann's team. These could be trading companies that procure large quantities of goods at regular intervals and have to pay their suppliers immediately. But they are also suitable for providers in the field of renewable energy or other infrastructure projects who frequently receive supplies from home and abroad and always need enough capital to settle their bills.

Regular supplies and good documentation: These are the ideal conditions for a letter of credit transaction. The specialist at HCOB develop simple and smart to use letter of credit structures based on the respective business models of their customors. In joint workshops HCOB ensures smooth onboarding process for established employees and customers. The examination of the documents usually takes just a few days – after this, HCOB as the issuing bank of their importe customer immediately remits the countervalue of the goods to the supplier. Importers also secure valuable supplier accounts with this ultra-fast mode of payment. Because cash is king. The importing customers of Hamburg Commercial Bank in turn then have up to 270 days time to repay the letter of credit.

The financing function taken over by HCOB enables its customers to take care of the processing and distribution of their goods even for projects with a longer duration.

A classic bank loan in the case of a loan as a result becomes an account payable. There are no differences worth mentioning regarding the conditions between a loan and letter of credit. "The letter of credit is not just more suitable to large-scale use, but also far more affordable than its reputation," Beckmann said.

On top of this, there are the beneficial balance sheet effects: The liability side of the balance sheet is improved by the reduction of bank loans. "This has a positive influence on the rating relations – and as a result in turn on the financing conditions of the company," notes HCOB expert Beckmann. Consequently, clever entrepreneurs let the money work for them.

This is how a letter of credit is settled

Andreas Beckmann

Phone: +49 40 3333-13693
Fax: +49 40 3333-613693
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