High banking commissions are one of the biggest problems in international trade finance that exporters have to face who would like to use letter of credit payment option in their business transactions.
Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price. Letters of credit are one of the most expensive international payment methods available on the market. As a result exporters find themselves in a dilemma when negotiating the terms of the business conditions. Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.
What are the main letter of credit fees that exporters have to pay?
It is realy hard to answer this question. Because what rules say is different than what the daily practice dictates.
According to Rules : Issuing bank must pay all bank commissions as per UCP 600 which is the latest ICC rules of documentary credits.
Real LifeSituation : Applicants pay the letter of credit issuance charges and all remaining l/c costs will be collected from the beneficiaries.
Bank commissions that exporters normally have to pay can be grouped under these headings :
I would like to share a real life bank commissions example below. These bank fees were collected from a British exporter under a letter of credit transaction. As you can see they had to pay 487GBP to banks as letter of credit fees. Total transaction amount was only 1890GBP. Letter of credit fees are 25% of all transaction amount and this is unacceptable.
Figure 1 : Real life example of bank commissions under a letter of credit transactions.
Suggestions to eliminate high bank commissions under letters of credit transactions for exporter :
Suggestion 1 : Do not use letters of credit to low value transactions. As a general rule of thumb transaction amounts below 10.000USD to 15.000USD can be considered as a low value businesses. Try to use alternative payment methods instead of letters of credit on these occasions.
Suggestion 2 : Try to convince your customer so that the letter of credit fees will be paid by the applicant. Remember letter of credit rules are on your side.
Suggestion 3 : The worst case scenario may be that you can not find an alternative payment option and your customer does not want to pay letter of credit charges except for the l/c issuance costs. If this is the situation than try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.