Introduction
Letter of Credit Discounting: LC discounting and non-LC discounting are the major parts of the trade finance mechanism that help every exporter to get immediate funds to enhance their working capital. All the risk has fallen on banks or financial factoring companies, which are responsible for the credit risk. It’s the letter of credit that the exporters get from the bank or factoring companies.
This has giant benefits like instant cash flow, risk mitigation, and smooth working capital. Letter of credit discounting does not support non-LC discounting as a financial mechanism. This type of discounting is based on buyers’ and sellers’ relationships with the factoring companies. To know more about LC and non-LC discounting, continue reading the content below.
All you Need to Know About Letter of Credit Discounting
- What is LC Discounting
A trade finance tool that helps millions of exporters to upgrade their working capital by providing instant cash flow. It is the letter of credit that allows exporters to receive payments prior to the last date the invoice is due. There is no longer a wait for exporters to receive invoice payments.
The process of LC discounting starts with export and shipment, submission of the document, request for discount, verification done by factoring companies or banks, and advance payment is done for final reimbursement. There are two types of LC: one is with and the other is without recourse.
- Benefits
The advantages of LC Discounting are improved cash flow, zero collateral, and ultimate flexibility available for any type of exporter. The letter of credit itself is the security instead of collateral or debt. In fact, there is immediate access, which is lacking in all other discounting and makes the exporters simplify trade credentials and their process. Furthermore, the conversion of receivables into cash boosts ratios and improves liquidity.
- Positive Impact on Factoring Companies:
The exporter exports products and goods to the customers or clients with the help of credit. The local bank verifies the LC after receiving it from the customer’s bank to ensure confidentiality. The factoring company’s or bank’s fees depend on the total amount, their profile, and their chosen tenor. Eventually, on the LC date, the bank or factor receives the complete amount from the customer’s bank.
Non Letter of Credit Discounting
- What is Non-LC Discounting
The non-LC discounting is based on the bank providing an early amount without the letter of credit. This type of discounting is applied against bills and invoices. Non-LC discounting has a specific set of principles to follow with factoring solutions. Indeed, non-letter-of-credit discounting helps to access faster working capital, increases cash flow, competitive advantages, credit risk transfer, and more.
- Features and Roles
It has no letter of credit discounting, and it acts based on trade credentials. Additionally, it provides short-term financing, and buyers face greater risk when using non-letter of credit discounting. Moreover, it has high flexibility and quick processing for better accessibility. The role of a seller is to ship goods, and the buyer’s duty is to accept the purchase in order of credit discounting. However, the banks’ or factoring companies’ role is to evaluate and enable the discounts.
- Non-LC Discounting in Factoring Company
In most of the transactions in domestic trade or foreign trade, non-letter of credit discounting has been involved. The seller will sell the bill or invoice to the factor, and the factoring company will discount a rate in exchange for their unpaid bill. In fact, there are giant benefits like open account rate, improved cash flow, and mitigated risk.
Wrapping Up
Letter of credit Discounting plays a major role in factoring companies. Every business owner must know about the features and benefits of LC discounting and non-LC discounting, which may help their upcoming business to expand worldwide. Without waiting for the funds, SMEs, MSMEs, and other business owners can rely on these discounting services to accelerate their business worldwide. Therefore, enhance your working capital with innovative credit solutions. Why take unnecessary risks when you can rely on Growmax Fintech? Choose Growmax and develop your small-scale and large-scale industry worldwide.