Documentary loan, basic guide to understand it
If we talk about foreign trade, it is essential to talk about documentary loans. These fulfill three fundamental functions: guarantee , payment and financing . For a company that accesses these markets for the first time it is usually a great unknown, so we are going to make a quick guide to documentary loan.
In the first place, we will see what they are and their basic operation ; then, we will focus on the different types of documentary loans that exist and the most common commissions that they generate; to finish seeing the advantages and disadvantages that the documentary loan has for both the importer and the exporter.
Documentary loan: definition and operation
The documentary loan is a payment mandate that the importer sends through his financial institution so that, directly or through another bank, he pays the exporter the amount of the operation, provided that said exporter strictly complies with the condition of the own loan (usually the delivery of certain documentation). Let’s see it more carefully to understand the role played by each of the parties:
1. The first step is for the importer and exporter to reach an agreement , have an international sales contract and clear the conditions of the documentary loan, with all the documents that must be collected in it. At this time, the importer will ask his bank to open the documentary loan in favor of the exporter, including in this request all the conditions of the loan.
2. The second step depends on the issuing bank (importer), which receives the loan request, studies the documentation and the risk of the operation and proceeds to its approval or denial . In the affirmative case, the loan issuance is made by subscribing with a bank of the exporting country (advising bank) the document where said documentary loan is materialized, informing the importer of this.
3. The third step depends on the bank of the exporter, who notifies the opening of the documentary loan and informs him of the conditions. The exporter will study these conditions and if they are in accordance with what was agreed with the importer, he will proceed to send the merchandise.
Once the merchandise is shipped, the exporter will present all the required documentation in the bank. In this case, if everything is in accordance with the stipulations, the advising bank pays the exporter the amount of the loan , either at sight or accepts to pay at a later date. It then sends the documentation to the issuing bank and confirms the payment terms. The issuing bank will reimburse the advance amount and deliver the documentation received against payment at sight or against acceptance of payment at a later date.
Finally, the issuing / importing bank will make the payment and with the received documentation the issuing bank will be able to withdraw the merchandise . The payment may be at sight or at a future date, depending on the loan conditions.
A Spanish company (the payer) imports Jamaica sugarcane for one million euros. In agreement with the agreement with the Jamaican exporter (beneficiary), he goes to his bank (confirmer), requesting that he opens a documentary loan (also known as a letter of loan ) for that figure.
In said document or letter it is stated that the issuing bank will pay that figure when the exporter sends them a specific documentation. The usual is the bill of lading of the goods , plus any other documentation deemed appropriate (health certificates, surveys, insurance, etc.).
The usual risk of charging or not charging itself for any commercial operation, joins the fact that they are usually volume operations, with complex claims to carry out, when intervening different jurisdictions. Therefore, the documentary loan is a risk operation for the financial institution .
Protect yourself against commercial risk with documentary loans L / C: more information
Classes of documentary loans
Documentary loans may be revocable or irrevocable . The first lack much sense, because they allow to be canceled after its issuance, failing to fulfill the function of guarantee, so generally we will find irrevocable documentary loans.
Unconfirmed documentary loan. The issuing bank of the loan, to communicate to the exporter of the same, will make use of a bank in the country of said exporter. That bank is the so-called advisory bank, which will act on behalf of the issuing bank, communicated the opening of the loan, collecting the documentation, paying in its case.
If the advertiser is limited to this, it is a confirmed documentary loan, it originates when the exporter has requested, and the issuer has done so, that a bank in his country, either the advising bank or another one that the beneficiary indicates, guarantees that the The issuer will pay you.
Depending on when the payment occurs, it will be at sight , against the delivery of the documentation or in a later period , from the delivery of the same.
Transferable documentary loans are those in which the beneficiary can indicate other people who can share the guarantee and who will be paid the money, usual if the exporter is a mere intermediary or broker, acting on behalf of other customers.
Another modality with similar purposes is the backtoback documentary loan , which is when the exporter-broker opens or orders a documentary loan with the guarantee of another of which he is a beneficiary.
The documentary loan may have a partial advance clause in favor of the beneficiary, before delivering the documentation. If it is the red clause it will be against a mere receipt of the funds or an endorsement. If it is green, you will need to prove ownership of the merchandise.
Finally, we should mention revolving documentary loans , those that allow to be reused during a certain period of time.
Usual commissions for documentary loans
Remember that the documentary loan is a hybrid of guarantee and means of payment , which in turn enables its use as a financing tool . The commissions that affect this type of loans are shared between payer and beneficiary.
The paying company will pay structured commissions such as the guarantees: an opening commission and a quarterly risk . If the payment is deferred, the quarterly risk is replaced by an equivalent for deferred payment since the documentation is delivered. If there is a need to modify the loan or there are discrepancies (discuss the delivered documentation), commissions are also charged. In addition, the expenses of the swift used throughout this process are usually passed on.
The beneficiary must take charge of commissions such as the notice of the paying bank, the confirmation, the transfer or the cash payment . This agreement can be negotiated to be assumed by the payer.
Advantages and disadvantages of documentary loans
Among the advantages for the exporter will suppose a high security in the payments , as well as punctuality in the collection if all the required documents are presented. It also enables financing with guarantee of the documentary loan itself. For the importer it offers security on the date and conditions of delivery of the merchandise. It also guarantees its solvency before the exporter.
As regards the disadvantages, it has a higher cost than other means of payment. The exporter may have some difficulty in presenting all the conforming documents. For the importer the biggest inconvenience may arise from having to make the payment without verifying the characteristics of the merchandise.