Legal Definitions - export letter of credit

An export letter of credit is a financial instrument used in international trade that guarantees payment to an exporter (the seller) for goods or services shipped to a buyer in another country. It is essentially a promise from a bank (on behalf of the buyer) to pay the exporter a specific amount of money, provided the exporter fulfills all the conditions outlined in the letter of credit, such as shipping the correct goods by a certain date and presenting the required documentation.

From the exporter's perspective, an export letter of credit significantly reduces the risk of non-payment, as a reputable bank is committing to make the payment, rather than relying solely on the foreign buyer's promise.

• Example 1: Industrial Equipment Manufacturer

  A German company, "Precision Robotics GmbH," manufactures highly specialized industrial robots. They receive a substantial order from an automotive factory in Mexico, "AutoFabrica S.A." Precision Robotics GmbH is hesitant to begin production and ship the expensive machinery without a guarantee of payment, as they have no prior business relationship with AutoFabrica S.A.

  How this illustrates the term: AutoFabrica S.A.'s bank issues a letter of credit in favor of Precision Robotics GmbH. For Precision Robotics GmbH, this is an export letter of credit. It assures them that once they manufacture the robots, ship them to Mexico, and present all the required shipping documents (such as the bill of lading, inspection certificates, and commercial invoice) to their own bank, they will receive payment from the issuing bank, regardless of any potential payment issues from AutoFabrica S.A. This guarantees payment for their exported goods.

• Example 2: Agricultural Produce Supplier

  "Green Harvest Farms," an agricultural cooperative in Peru, secures a contract to supply a large quantity of organic quinoa to a health food distributor in Japan, "Nourish Foods Inc." Green Harvest Farms needs to invest in harvesting and processing the quinoa, and they want assurance that they will be paid upon delivery.

  How this illustrates the term: Nourish Foods Inc. arranges for its bank to issue a letter of credit in favor of Green Harvest Farms. From Green Harvest Farms' perspective, this is an export letter of credit. It means that once they harvest, process, package, and ship the organic quinoa to Japan according to the agreed terms, and provide the necessary shipping and quality control documents (like phytosanitary certificates and certificates of origin) to their bank, they are guaranteed to be paid by the Japanese bank. This protects Green Harvest Farms, the exporter, from the risk of non-payment by the foreign buyer.

• Example 3: Custom Software Development Firm

  "InnovateTech Solutions," an Indian software development company, wins a contract to build a bespoke e-commerce platform for a startup in Australia, "RetailFuture Pty Ltd." The project involves several development phases and significant upfront work. InnovateTech Solutions wants to ensure they are paid for each completed milestone.

  How this illustrates the term: RetailFuture Pty Ltd.'s bank issues a letter of credit in favor of InnovateTech Solutions, structured to release payments upon the completion of specific project milestones and the submission of corresponding verification documents (e.g., project completion reports signed by both parties, code delivery confirmations). From InnovateTech Solutions' viewpoint, this is an export letter of credit for their services. It assures them that as they complete each phase of the software development and provide the agreed-upon documentation, their bank will facilitate payment from the Australian bank, mitigating the risk of non-payment for their exported services.