What Is An At Sight Letter Of Credit?
An At Sight Letter of Credit is a letter of credit (LC) that is payable once the exporter/seller meets all of the requirements of the letter of credit.
This type of LC provides the fastest mode of payment to the exporter/seller, when selling to their overseas importers/buyers.
Letters of Credit
All letters of credit, including at sight letters of credit, are reliant on certain documents.
In order to be paid, the beneficiary (seller/exporter) must submit all the required documents to the bank.
The required documents usually include the letter of credit itself and all other documents that show that the seller/exporter has met his obligations in the deal.
Letters of credit are instruments used to guarantee payment, and are separate from a purchase or sales agreement.
LCs are utilized to ensure that each side of the deal delivers on their obligations in the deal.
The issuing bank of the letter of credit guarantees payment and blocks the money for the deal until they receive confirmation that certain requirements are met.
To set up a documentary letter of credit or at sight letter of credit, the paying party applys for a letter of credit at a bank or through a trade finance organization.
Exporters / Sellers
If you are an exporter / seller and am selling something internationally, you can be assured of payment by using a letter of credit.
With a properly issued letter of credit, you will be paid as long as you mee the terms and conditions stated in the letter of credit.
Payment is most often guaranteed by a reputable bank, therfore you’re not relying on the underlying credit capability or willing to pay of a buyer that you may or may not familiar with.
Importers / Buyers
If you are a importer/buyer, a letter of credit can keep you from losing money in the case that the agreed upon shipment never arrives.
Instead of paying for the goods or services upfront, a letter of credit blocks the funds needed in a bank until the exporter/seller can provide the required documents that prove that a shipment to you has taken place.
Even though a letter of credit can greatly decrease your risk exposure in a deal, it will not completely eliminate all risk.
The exporter/seller could ship goods that aren't as you agreed upon in the purchase order or they could even commit fraud a ship you nothing at all.
The bank blocks the funds only against the required documents, and will not ensure that the the order is fulfilled as agreed upon in the purchase agreement.
One option to further protect yourself is to add a required inspection certificate to the letter of credit, which gives you the opportunity to inspect the content of the shipment before payment is released.
How Long Does It Take To Receive Payment?
Even though receiving payment through is fairly quick, that doesn't mean that it is instant.
The exporter's/seller's bank will first review all of the submitted documents to confirm that they meet all of the requirements of the letter of credit.
This can take a few business days.
Sometimes, the required documents get forwarded to a second bank for review before being sent to the issuing bank and payment is made.
Once all required documents have been received by the issuing bank, the funds can be released.
When dealing in international wire transfers, it usually will take a day or two for the funds to arrive in the beneficiary's account.
In general, plan on 5 business days for every bank that is reviewing the required documents and and another one to two business days for the funds to be transferred.
How An At Sight Letter Of Credit Doesn't Work
A deferred payment letter of credit is not an at sight letter of credit. This type of LC is called an usual example letter of credit, and it states that payment is to be paid at some future point in time.
With an usance LC payment is made long after the required documents are presented.
This could be 30, 60, 90 or 180 days after the documents are presented.
Deferring the payment allows the importer/buyer more time to come up with the funds to close the deal.
You could even say that a differed LC is a type of seller financing, allowing the buyer or the goods to turn around and resell the goods to a second buyer without paying any upfront costs out of their own pocket.
Other Variations Within Letters of Credit
All letters of credit have a multitude of various features within them. For example, if a letter of credit becomes irrevocable, they become much more difficult to cancel unilaterally.
Confirming a letter of credit is called a confirmed letter of credit, and will add further security as the bank must be a trusted bank.
So Why Should You Use An At Sight Letter Of Credit?
An At Sight Letter of Credit is highly beneficial for the exporter/seller and the importer/exporter as payment will be paid to the seller before the buyer receives the goods, and the seller must ship the goods to the buyer before receiving payment.
It's a win-win situation for both parties.
This is why most all importers and exporters of goods internationally prefer to use At Sight Letters of Credit.