Do you plan on expanding your business overseas? Well, why not? Many SMEs hold back their expansion due to one apparent reason: finance. Often, an SME faces carrying out international transactions as a hurdle when conducting business overseas.
However, reputed financial institutions can be a smooth means of receiving and sending money abroad. Nowadays, several SME financing institutions are introducing various methods to help business owners.
So, without further due, let us see how banks make international transactions easier by using a letter of credit. In addition, find some tips on selecting a bank for your SME funding.
How do Banks Make International Transactions Easier?
SMEs looking forward to taking their businesses to foreign countries face numerous difficulties during transactions. Hence the hesitancy to do overseas business. But with the help of a reliable bank, business owners can overcome this hurdle. There are numerous ways in which a bank comes to SME’s aid. A reputable bank offers the best possible service, from managing their transactions to providing them with correct guidance.
However, one such financial tool can be a blessing for expanding SME financing. ‘Letter of Credit’ is a promising letter of transaction exchanged from the payer’s bank to the payee’s bank. It assures the business owner at receiving end that money will arrive in the bank account on time.
Letter of Credit: Uses and Benefits
As mentioned above, a letter of credit promises receiving and sending a payment overseas for an SME. Do you know why banks prefer using it? Here’s the benefits and uses:
- Assurance of Payment
The issuer’s bank conducts thorough background research about the finances of the letter’s issuer. It is authorised by the bank only after knowing about the issuer’s financial assets and credit score.
This gives the SME on receiving end assurances about getting the money. As a result, it acts as one of the most reliable instruments banks uses for SME financing.
- Role of Financial Institutions
Once the seller and buyer have received the letter of credit, the responsibility falls on the bank. Financial institutions assuming complete responsibility for SME financing on both ends make it a more streamlined process.
- Personalised Terms and Conditions
SME financing approaches are different for every business. Therefore, banks allow the inclusion of personalised terms and conditions while drafting a letter of credit. Thus, making it a flexible SME financing instrument.
- Quick Approval and Zero Collateral
Banks have separate departments to cater to SME financing, which makes the issuance of instruments like letters of credit quick. Moreover, there is no need to submit any collateral while getting a letter of credit drafted.
Is Bank Letter of Credit Same as Bank Guarantee Procedure?
A bank letter of credit differs from the bank guarantee procedure. A bank letter of credit is a payment instrument used in international trade transactions. It provides payment security to the seller (beneficiary) by guaranteeing they will receive a payment if they fulfil the terms and conditions specified in the letter of credit.
On the other hand, a bank guarantee is a commitment by a bank to pay a specified amount to a beneficiary if the applicant fails to fulfil their contractual or financial obligations. It assures the beneficiary that they will receive a payment if the applicant defaults.
While both instruments involve banks providing a guarantee, they serve different purposes and procedures. The bank guarantee is focused on ensuring the fulfilment of obligations, while the letter of credit is primarily used for payment security in international trade.
Tips to Find a Reliable Bank for Letter of Credit
Many RBI-approved banks provide SME products related to finance. Find reasons listed below that makes a financial institution worth partnering with to assist a business with international transactions.
- Overseas Transaction
Entrepreneurs or business owners scaling their trade to foreign countries must have a reliable bank. It should assist them in issuing and receiving various payment methods that are valid internationally.
When selecting a financial institution to conduct overseas business, it is essential to note their authorisation. What gives surety about banks to SMEs is their onboarding process, facilities, customer service, and many more things. After all, SME financing is a major concern for businesses.
- Expert’s Advice
Business owners are smart enough to make financial decisions. However, expert advice is necessary when dealing with financial instruments like a letter of credit. Your bank must have a finance desk that assists you in streamlining the process. Here comes the role of a good financial institution.
- Currency Exchange Analysis
A bank that monitors changing currency value can be an asset for SMEs. Such financial institutions ask the business owner to delay or pre-pone the issuance of a letter of credit.
- 24/7 Support
Customer support is one of the most crucial services that make any business organisation reliable. In the case of financial institutions, the assistance should be such that you don’t have to visit the bank every now and then.
- Digital Services
Visiting the bank and carrying out the whole SME financing procedure can make you stay caught up on a deal. Therefore, finding a reliable bank that offers digital services like issuing letters of credit is necessary to simplify your international transactions.
- No Hidden Charges
A reliable bank ensures complete transparency with SMEs it provides financial services. Nowadays, a business owner might find the term mentioned while signing a document with the bank. Therefore, it is necessary to ask questions and steer clear of such additional costs.
Now that you know how the letter of credit makes international transactions more manageable let us tell you about a bank to move ahead with. HDFC Bank offers letter of credit services and many more with 24/7 assistance and no hidden charges. So, go on with your expansion and remember their website for more detailed information!