What is LC discounting?
In the Letter of Credit discounting process, the bank purchases the documents or bills from the seller after the shipment is done and the bill is accepted under LC by the LC issuing bank and in return make him the payment by charging discounting interest.
Discounting of Letter of Credit (LC) is a short-term credit facility or can be also termed as a loan provided by the bank. Discounting happens when the seller wants payment early whereas the buyer does not want to pay immediately. So, to resolve this difficulty, the bank offers the seller to get the immediate payment after shipment and the buyer gets a longer credit period for payment by issuing usance LC. Therefore, LC discounting protects the interests of all parties involved in the trade or transaction.
How does the process work?
- Step 1: Seller and Buyer enter into a sales contract by agreeing on the terms and conditions of the business transaction.
- Step 2: Buyer contacts to the issuing bank for the issuance of the negotiable letter of credit.
- Step 3: Issuing bank issues a negotiable letter of credit in swift format and sends it to the nominated bank which is also the negotiating bank and advising bank.
- Step 4: Negotiating bank advises the letter of credit to the Seller. Seller checks the letter of credit conditions, if they are acceptable to the exporter; he starts production of the goods.
- Step 5: Seller ships the goods within the validity of the letter of credit and not later than the latest date of shipment mentioned in the L/C.
- Step 6: Seller presents the documents to the negotiating bank within the presentation period allowed under the letter of credit.
- Step 7: Negotiating bank checks the documents presented by the Seller. The “negotiation” is effectively the purchase of documents from the Seller at a discount (discount is often called as discounting interest).
- Step 8: Negotiating bank presents the documents to the issuing bank once they find it compliant with the terms of the LC.
- Step 9: Issuing bank checks the documents and (if compliant) issuing bank gets in touch with the Buyer and delivers documents to them for their acceptance. Buyer accepts them to be paid to the negotiating bank at maturity. At the same time, issuing bank sends acceptance Swift to Negotiating bank confirming documents are accepted under LC.
- Step 10: Negotiating advances cash to the Seller.
HOW TO GET LC DISCOUNTING FROM BANK
Globalization has given a boost to imports, exports and domestic trades. A lot of people who are into import, export and domestic trade need discounting of the letter of credit. Advisors or goes to the bank directly to get the best rate to discount the LC or there are online websites like https://www.lcbidding.com/ (LC discounting interest rate price discovery platform)
The following are the steps a company has to follow for Bill discounting limit
- Step 1: Beneficiary or applicant can contact to https://www.lcbidding.com/ or bank or advisors to get the best quote to discount there LCs. Getting quote form www.lcbidding.com is better as they approach multiple banks to get the best quote and the bank provide discounting in quick turnaround time.
- Step 2: KYC required to be provided along with basic financial info to evaluate and provide the best quotes for you.
- Step 3: Bank provides the quote and fixes a threshold limit for discounting the LC bill for a given period. Bank will provide LC backed bill discounting (LCBD) facility without any collateral as it is backed by LC.
ADVANTAGES OF LC DISCOUNTING
- It speeds up the cash flow movement in the organization as the beneficiary receives an advance payment after shipment of goods and once the bill is accepted by LC issuing bank which helps in the smooth movement of working capital in the organization.
- LC Discounting eliminates the credit risk, as the LC issuing bank gives assurance to the discounting bank for the buyer’s obligation.
- LC Discounting is a safe and secure mode of getting funds, as the bank discounts LC only after receipt of acceptance form LC issuing bank and which in turn receives acceptance from the buyer.
- Cost of funds received on discounting is very low so it’s very cost-effective.
- It allows the beneficiary an opportunity to give longer period of time for payment to his trading partner. This not only puts the beneficiary in a better position to negotiate for the deal but also helps to build a strong relationship with their trading partner.
Disadvantages of LC DISCOUNTING
- Bank charges a fee or margin for discounting LC. This results in beneficiary paying up extra fees for the amount due to him.
- Since the discounting rates vary from bank to bank, the beneficiary may be troubled in selecting which bank to visit for LC discounting. (This problem can be solved with www.lcbidding.com)
- Forex risk is associated with LC discounting. The exchange rate of currency of different countries keeps on changing on a day-to-day basis which can be prove to be a potential loss to the beneficiary.
- Rules governing discounting of LC are complex.
- It is a little time-consuming process, as various rules need to be fulfilled by the beneficiary and verified by the bank.