There are several situations where a business is either unable to get access to a letter of credit, perhaps due to the supplier or customer does not want to use an LC to finance the transaction.

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Given that open account trade cover 80% of cross-border trade, businesses with good commercial relationships often will not use LCs.

Alternatives to LCs are often used to finance small purchases, perhaps those under $250k, given that they are significantly cheaper and faster to set up.

 

Revolving Lines of Credit 

• In cases where a business has a good trading history, as well as paying its vendors and suppliers in time, revolving vendor accounts can be used to extend payment terms.

• Using these tools, a business can order supplies, materials, and services in advance on credit. Once all the necessary materials are ordered, a business can forward them to end users or customers, paying the supplier before the credit is due.

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Purchase Order Financing

• In this case, PWTF can organize and or can finance the advances or outstanding payables on any goods and services paid, assuming the risk of the sale contract not being fulfilled.

• This type of financing is usually made for a relatively short period and it is not as uniform as a Letter of Credit.

 

Invoice Factoring

• This alternative to LC assumes that a third party organized by PWTF, will advance the seller for up to 80% of the total charge, assuming the risk of the customer or buyer paying the invoice in total once the goods arrive.

• Once the invoice is paid, the bank’s fee is withheld, and the rest of the funds are transferred to the seller’s account.

• This tool is very useful to companies that suffer from diminished liquidity, but as the bank is taking more risk than when using a Letter of Credit, it is significantly more expensive than an LC.

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Forfaiting

• Forfaiting is defined as the selling, at a discount, of medium-term accounts receivable, bills of exchange or promissory notes of a foreign buyer.

• The debt is normally associated with international trade of goods and services.

• The debt obligation of the foreign buyer is commonly guaranteed by the buyer’s bank but may also carry the guarantee of the buyer’s government.

• Forfaiter’s characteristically purchase the debt instruments from exporters without recourse.

• This means that if the borrower defaults on the debt, the exporter will not be held liable.