Import letters of credit
Margaret Byers explains how import letters of credit work in international trade transactions to benefit buyers and sellers. The primary differences between an import letter of credit and a standby letter of credit are also discussed.
Lori Crever: Hi. I'm Lori Crever and today, I'm joined by Margaret Byers, relationship manager with Wells Fargo International Trade Services, to talk about Import letters of credit. Margaret, thank you for stopping by.
Margaret Byers: Thank you.
Lori Crever: Let's start by having you tell us about your role in the Wells Fargo International Group.
Margaret Byers: Sure. I'm a Trade Services relationship manager and I work with Wells Fargo's customers who are sourcing product from abroad. They're importers. Many of my customers are in the retail consumer products and apparel industries.
Lori Crever: All right. So, I'm a company that is doing business internationally. What are the basic payment methods available to me?
Margaret Byers: Many of the importers use all four of the international payment methods. They can pay cash in advance. Which means they wire transfer a payment prior to shipment of the product or they could do open account terms, which means they would receive the product and then make payment. Obviously, cash in advance is more risky. An open account is on the lower end of the risk scale. They can also use import letters of credit, or documentary collections. Now these two payment methods fall in between cash In advance and open account on the risk scale.
Lori Crever: Well, then let's drill in a little bit further. Tell us, what is an import Letter of credit? How does it work?
Margaret Byers: Sure. An import letter of credit is a bank's undertaking on behalf of their customer, who is the buyer. The letter of credit is issued to the supplier overseas. Letters of credit are the bank's assurance of payment to the supplier once all the terms and conditions of the letter of credit have been met. So a supplier has the bank's assurance that they're going to get paid if they comply with the terms of the letter of credit and the buyer will not have to pay unless all the conditions of the letter of credit have been met.
Lori Crever: Now tell us, what is the difference between what you described, an import letter of credit, and then a standby letter of credit?
Margaret Byers: Sure. Import letters of credit are typically used with trade transactions. They are the primary means of payment. So, a bank would issue a letter of credit. It is sent to the supplier and the supplier makes shipment and then is paid. They're intended to be drawn upon. With a standby letter of credit, they are secondary means of payment. They're only used when something goes wrong with the transaction. Again, they're not intended to be drawn upon.
Lori Crever: What is the set of competitive advantages that an importer will find when they choose Wells Fargo as their solution provider?
Margaret Byers: Lori, you know, delivering superior trade services is core business for International Trade Services. Wells Fargo has nine processing centers throughout the world. Five of which are located in Asia where most of my customers are sourcing their product. We have the Wells Fargo processing centers provide quality processing and customer service with local time zone and language support. Strong financial ratings make it possible for our letters of credit to be readily acceptable by suppliers throughout the world. We have a web-based, integrated platform that gives the buyers and sellers transparency of the entire financial transaction.
Lori Crever: That is a terrific set of advantages. Thank you, Margaret, so much for coming in today.
Margaret Byers: Thank you. My pleasure.
Lori Crever: If you'd like to learn more about how to position your company for success in the global marketplace, talk to your Wells Fargo International Trade Services relationship manager.