A long-term credit is a letter of credit (L/C) opened by the importer in the exporters favour and confirmed by a foreign bank. It sets out the conditions and terms of settlement of international trade and is used to facilitate international trade. When one party opens a long-term letter of credit accompanied by the other partys payment guarantee, international trade finance becomes easier and more secure.
A long-term letter of credit is a particularly useful tool and financial instrument for international trade, because it is more flexible than other traditional payment methods such as open account, documentary collection and cash in advance. With a single long-term letter of credit, the exporter can secure significant amounts of payments from the importing country and benefit from the predictability of timely payments from the foreign bank.
To open a long-term credit, the importer has to provide a letter of credit application along with certain documents to the issuing bank. The issuing bank reviews the application and the documents and if everything is in order, it issues the letter of credit in favor of the exporter. The issued letter of credit has to state the details of the goods to be shipped, the payment terms and the expiry date of the credit. The exporter can use the long-term letter of credit as a security to obtain additional finance from his/her bank.
The key benefit of a long-term credit is that it allows the exporter to secure payment at an expected time as advised in the credit. The exporter, in return, is free to decide when and how much to ship, unlike other payment methods where the exporter risks a shipment before receiving payment. Also, with a long-term credit, the exporter can benefit from deferred payment terms, allowing the importer to manage his/her cash flows more efficiently.
Since a long-term letter of credit is a strict financial instrument and governed by international conventions, it is essential for both parties to have a good understanding of the terms and conditions included in the letter of credit before opening. Furthermore, each party should ensure to strictly comply with its obligations so as to avoid any dispute. If there is any disagreement, the parties are advised to seek legal advice from an experienced commercial lawyer in the relevant country.
To sum up, a long-term letter of credit offers importers the advantage of predictability, enabling them to manage their cash flow more efficiently and exporters the benefit of payment security before their goods are shipped. This financial instrument can be an invaluable tool to facilitate efficient international trade and is therefore considered to be an important risk management tool by business traders.
