In Singapore, you have undoubtedly heard of the “Letter of Credit” at some point. What is a letter of credit, though? A letter of credit is backed by a reputable bank and is an essential financial tool that ensures sellers receive full and timely payment.
This document is essential to international trade, especially considering Singapore’s thriving and globally integrated economy. It serves as an effective framework that ensures seamless transactions and, on occasion, reduces risks for all parties engaged in global trade.
How a Letter of credit Operates in Singapore?
When making large purchases under Singapore’s trading system, buyers might require a letter of credit. The vendor is guaranteed payment with this letter. In this letter, a Singaporean bank like DBS assures the seller that they will get payment.
The bank will not guarantee payment until the buyer proves they have sufficient funds or a suitable credit line. This demonstrates their ability to afford the purchase. In order to grant a letter of credit, banks typically require cash or assets as collateral.
The letter of credit functions similarly to a transferable promise. The recipient may assign this right to another person, such as a corporate parent or third party if it is transferable.
Types of Credit Letters in Singapore
In Singapore, letters of credit come in four primary varieties. Among them are:
- Letter of Credit for Commercial Use
The issuing bank can make payments directly to customers using a business letter of credit. Its issuing bank pays the person or company to whom it is intended.
- Letter of Credit Revolving
A consumer can use a revolving letter of credit more than once throughout a predetermined time. As long as they don’t exceed a specific amount, they can request withdrawals many times. When a lot of commodity shipments occur on a regular basis, this is helpful since it eliminates the need to create distinct letters of credit every time.
- Traveller’s Credit Letter
A letter of credit for travellers ensures that foreign banks will accept the drafts from the issuing bank. This offers a dependable method for handling banking transactions for those who are travelling overseas.
- Verified Credit Letter
An authorized letter of credit functions by involving a bank other than the issuing bank. The confirming bank is this second bank, which is usually the seller’s.
Singapore’s Trade Requirement Letter of Credits
Irrevocable Letter of Credit
In Singaporean trade dealings, the irrevocable letter of credit is frequently utilized. Because it cannot be changed or cancelled without everyone’s consent, it offers the seller a great degree of security. This kind is preferred due to its dependability and payment guarantee.
Back-to-back Letter of Credit
When many parties are involved in a transaction, a broker in Singapore will use a back-to-back letter of credit. The buyer’s bank issues a letter of credit to the seller, which is subsequently used as security to get a second letter of credit for the seller’s supplier. This makes it possible for funds and products to move freely and securely.
Transferable Letter of Credit
The seller, who was the original recipient of this type of letter of credit, may transfer all or a portion of the credit to a subcontractor or supplier. In businesses where multiple entities contribute to the final product or service, this is very helpful. It offers financial arrangements in intricate supply chain flexibility.
Red Clause Letter of Credit
A red clause letter of credit in Singapore permits the seller to be paid in advance before the shipment of the goods. This is particularly helpful when the seller needs money to package or prepare the products for shipping.
Usance Letter of Credit
Once all the paperwork is in place, the issuing bank will accept the draft and promise to pay by the deadline.
