CFP International provides an easier way for Small Business Importers to issue Letters of Credit David Gustin - May 8, 2014 6:59 AM | Categories: Letters of Credit, Risk Management | Let’s face it, no one likes to use a Letter of Credit – we’ve covered this in a series of posts. See the four part series You want a Letter of Credit, Really? But if you are a small business, and your overseas seller is requiring you to issue a Letter of Credit (“LC”) to buy goods, the standard procedure is to approach a bank with an application which must be accompanied by a security deposit for the full amount of the LC. From there, it may take a matter of weeks before the LC is issued and goods can be ordered. Because the L/C is a Credit instrument, the process to open an L/C is intensive. The small business in this case advances money to the their bank in the form of a reduction in credit line, or collateral, or cash, in order to initiate the transaction, prior to the acceptance of the order by the seller. In essence, the Corporate is substituting the Banks Credit in place of its own. For such businesses, it’s difficult to 1) gather the funds required to collateralize their LC; and 2) remain patient during the three-plus months that their cash collateral lays dormant while the order is fulfilled. These represent enormous barriers to growth for the majority of SME import businesses. How does CFP International help small business preserve precious capital? CFP International arranges Letters of Credit to client businesses and the strength of their value proposition rests on their ability to issue LCs backed with their own collateral, not the client’s. CFPI facilitates and manages the process of the opening of Letters of credit on behalf of its clientele, and continues the ongoing management of the letter of credit process throughout the period for which a transaction may occur. CFP International uses the services of several American and European banks, and is a representative for two special purpose banks. The client pays a fee upon LC issuance to use the service provider’s resources, but the fee is much lower than what it would cost to using banks. The client still receives management of the LC process, and the instrument is transmitted using SWIFT messaging, through respected global financial institutions. CFPI provided this example of how their product works: A New York-based clothing importer, who has about $12 million per year of turnover, had come off a weak holiday buying season and because they were simultaneously expanding one of their business units, they found themselves undercapitalized to fill spring and summer inventory. This client uses LCs regularly, and sells on to large retailers who pay on reasonable terms. By switching to an LC with no security required, the client was able to get their goods to port having only paid a small fee. CFPI was then paid directly by the factor (after goods passed QA/QC inspection) who was already in place, which eased the flow of payments for the client. This structured solution offered the latitude to order all the inventory they knew they could sell, without damaging liquidity or extending their line of credit, and (most importantly) without impairing the expansion of the business. Cases like this are very common; the client was extremely satisfied with the structured solution because they were able to trigger revenue events that otherwise would have been out of their reach. If a client wishes to order up to $15 million worth of goods, CFPI can write a letter of credit whereby the client will not be out of pocket until his goods arrive at the destination port, or later. Even though it’s not a loan, the client is essentially borrowing up to $15 million for 90 days at a rate of approximately 2.5% (this may vary, as risk is calculated on a case-by-case basis) on the day the LC is issued. On days 2-89, goods are manufactured and shipped. The client pays nothing during this time. They do not risk any money outside of the fee. On day 90, the importer (or the importers factor) must pay CFPI for the goods using any means available to them. From a cost of capital perspective, no bank can compete with that, nor are they set up to do so. Related Articles You Want a Letter of Credit, Really? Part 4 You want a Letter of Credit, Really? Part 3 You want a Letter of Credit, Really? Part 2 You want a Letter of Credit, Really? Part 1 Voices (2) Zack: 13.05.2014 at 11:17 am @Tony Brown: Thank you for your comment. Most of our clients come to us specifically because BANKS AND FINANCIAL INSTITUTIONS no longer offer the services they need. We have found that the opinions of BANKS AND FINANCIAL INSTITUTIONS really are not relevant to our clients, or their counterparties. As far as the unfavorable scenario you mentioned, where suppliers don’t get paid, none of our several hundred clients share that concern with you. Lenders that provide PO financing have been doing business for hundreds of years. Is their obligation to pay based on their collateral position? I think not. Do asset-based lenders (a major American Industry) rely on cash collateral from their clients? I think not. Many hundreds of clients thank the process that companies like ours can provide. Maybe you should re-assess your thoughts about how American importers have relied on certain types of creative financing to allow them to participate in the great dynamic economy that we all enjoy. Reply Tony Brown: 08.05.2014 at 3:47 pm There’s no such thing as a free lunch. And in the case of many such service providers it’s important to understand that the LCs they arrange are often referred to as “inoperable” or LCs “with a string attached”. Banks and finance companies tend to frown at such instruments and often prefer to avoid them. It’s important to understand why. “Inoperable” LCs mean that one or more of the conditions or documents required to be presented for payment under the LC rests under the control of the LC arranger, not the supplier/beneficiary. An example might be a document issued by the arranger stating that goods have been received/inspected to the satisfaction of the arranger (note – the arranger not the buyer of the goods). If, for any reason, the arranger fails to present such a document the issuing bank will not pay the supplier — even if the supplier has performed and all other conditions and LC documentary requirements have been fully complied with. In extremis, this can give the arranger a way to avoid payment under the LC. This defeats one of the principal benefits on an LC – namely the certainty of payment from the issuing bank once the seller’s sale contract performance obligations have been met (as evidenced by documents submitted by the seller). As you might imagine, in circumstances where the seller has performed but the arranger delays or fails to provide a required document that triggers payment, the supplier might be mighty miffed — not to mention the supplier’s bank that might have taken comfort in the LC to provide pre-shipment finance to the supplier. It’s precisely because of the obligation of the issuing bank to pay once the supplier has performed that lenders take collateral. For lenders, the LC represents a contingent inventory loan. If someone gets harmed in these types of arrangements, it’s typically only good for lawyers since the remedy might require litigation. And it’s because of the risk of being drawn into disputes that banks tend to avoid “inoperable” LCs. It might be prudent, therefore, for the prospective user of such a service to pay for a litigation check on the arranger. This will list all actions in which the arranger has been named as a defendant. Of course, being named as a defendant is no evidence of culpability, but the incidence of litigation can often be a telling sign. Sure, the seller and (if appropriate) his bank should read any incoming LC carefully. If I were the seller, I’d want to make sure that I – certainly not an LC arranger — was in control of all of the documents needed for presentation under the LC to ensure payment. There’s a reason why banks take collateral for LC issuance. If someone offers a way to avoid this, it might pay to check if there any strings attached. Sometimes what might appear to be a free lunch could be costly in the end. Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.