Letter Of Credit Financing

The example involves a grain trader in Minnesota, who buys a shipment of grain from a producer and who plans to then resell the same grain to a buyer in the Middle East.

The example involves a grain trader in Minnesota, who buys a shipment of grain from a producer and who plans to then resell the same grain to a buyer in the Middle East. Using what is called the "warehouse receipts financing" method, the Minnesota trader acquires the grain and "deposits" it in a recognized public warehouse and, in return, receives a warehouse receipt, identifying - among other things - the type of grain, its quality, the quantity, and the date it was received into the warehouse.

The trader takes this warehouse receipt to his/her bank as evidence of his ownership and assuming everything is in order, the bank will then extend a loan to the trader a loan based on the estimated market value of the grain, less some percentage amount (sometimes called a “haircut”). The trader then contacts the buyer in the Middle East, who agrees to buy the goods in the public warehouse from the seller in Minnesota.

The L/C mechanism in this case is as follows:-1. The sales contract between the Minnesota seller and the Middle East buyer is agreed and both sides agree to do business on an L/C basis.

2. The buyer requests his/her bank to issue an L/C. This bank is the issuing bank. The L/C specifies that the seller must present certain documents to the bank before receiving payment and in this case the primary documentary requirement is the warehouse receipt.

3. The issuing bank notifies the seller through the correspondent bank (notifying bank ) by SWIFT and then sends the original L/C to the seller.

4. The seller presents his bank with a bill of exchange (draft) based on the conditions of the L/C together with the warehouse receipt and he/she applies for negotiation.

5. The seller’s bank checks the conditions of L/C and the warehouse receipt document. If the conditions of the L/C are found to be consistent with the documents, the seller’s bank pays the seller. However, the seller has to be very careful as the bank is not able to honour the bill of exchange if there is any discrepancy between the conditions of the L/C and the documents provided by the seller. If a discrepancy occurs, the seller has to inform the buyer and have him request the issuing bank for an amendment to the L/C accordingly.

The rules for letter of credit transactions are comprehensively dealt with under the International Chamber of Commerce (ICC) rules called “UCP 600”, which were updated this year.

Getting More Working Capital for Your Business

Lanette Tucker has been with Paragon Financial for 2 years and knows all things factoring.   Paragon Financial was founded in 1994 with the initiative to afford growing businesses an alternative to conventional bank financing. When banks either couldn't grant funds or bestowed too little, Paragon could promptly offer them a steady stream of cash through the factoring of their account receivables.

A common scenario today in business is having a low credit line from your bank.  Lets say you have a $50,000 dollar line of credit with your bank.  You have a long-standing, excellent relationship with your bank but in today's economy it is simply just not enough.   Your credit line is maxed out and the true need of your business is financing of $200,000 or $300,000 dollars to keep your business growing.  What can you do in this situation?  Your business has good credit, the orders are coming in and you are growing at a steady pace.  The only way to take your business to the next level is to secure that much larger line of credit.  What is the solution?

Your business can leverage against your receivables through invoice factoring or purchase order financing through a factoring company.  An experienced factor can work directly with your bank on a subordination agreement allowing you to leverage receivables financing to get the working capital you need to grow your business.

First, what is bank subordination?   A subordination is when a 2nd lender, in this case the factor, asks the 1st lender, the bank, if they will allow the business to take on an additional lender.   Bank subordination agreements are commonly done when leveraging accounts receivable and purchase orders. The accounts receivable or PO's are assets that are used to secure a working capital line of credit.   One of the most common ways lenders will work with each other is through subordination.  Allowing the business to take on both a traditional line of credit and a factoring line of credit

A factoring company can work with your bank and create a bank subordination agreement where their $50,000 dollars is covered by other assets and then a factor can fund against your accounts receivable or purchase orders up to 95%.  This allows the business to take on larger jobs, fund payroll each week and pay for other expenses.  The key is working with a factoring company that has existing relationships with banks and has the experience necessary to compete the transaction. 

Factors are often able to finance your business when a bank will turn you down.   Your bank needs to keep the depository relationship.  Factors do not concern themselves with this because they are not a bank.  Factors simply buy your existing accounts receivables or purchase orders in order for that business to obtain immediate cash payment of the accounts.  They just want to get your the critical cash your company needs to grow your business.

High Risk Borrowers Resort to Unsecured Loans

High risk borrowers can make use of funds for meeting important financial obligations such as consolidating debts, financing education, home renovation, buying car, or even for business expansion. Loans can had up to $25,000.

If you have a less than sterling credit history, you can still land a large unsecured loan. Because of these financially turbulent times, many people have had to take some bad hits on their credit records, often due to a period of unemployment or a financial investment gone awry because of restricted markets.

Arrears, late payments, missed payments, defaults, and even bankruptcies cloud the credit records of some of these folks, making them high risk borrowers. Many people have had these financial pangs and tend to be rejected by many lenders when they attempt to secure a high risk unsecured loan.

Online Lenders Ready for High Risk Unsecured Loans

Traditional brick and mortar lenders such as banks and credit unions have tightened their credit requirements since the housing bust and even good credit borrowers can have a tough time wresting an unsecured loan from them. So, a good place to start your search would be to go online. Private lending companies have stepped in to fill the gap left by the traditional lenders and many of them have set up shop online. As with any online transaction, check the security of the sites and the reputation of the lenders.

In fact, the market for high risk unsecured loans is so great that the many lenders offering such loans have to face some tough competition. You will be able to shop around for lenders with the lowest interest rates and the most comfortable repayment terms. You will even find brokers who will take your general information and provide you with a list of lenders who will probably lend to you based on the information given. Compare quotes and terms to find the most suitable deal.

Facts on High Risk Unsecured Loans

Since no collateral is required for these loans, and since the borrower already has a poor history regarding repayment, the lenders have to adjust their rates to cover the risk. Secured loans offer collateral which the lender can seize should the borrower default. Thus those loans tend to have lower interest rate because of the security offered to the lender. With the high risk of unsecured loans, you will find interest rates to be considerably higher than what the loan market usually offers.

Online application for high risk borrowers in need of unsecured loans is wonderfully easy and quick. You will need to offer documentation regarding your identification, your job history and present salary, proof of residency, and access to an active bank account (usually a checking account with direct deposit), and of course, your social security number. Often approvals are made in a matter of minutes and funds can be in a bank account within 24 hours, sometimes sooner.

Using Your High Risk Unsecured Loan

Hopefully you will have done your budget homework and requested just the amount you need with payments that are comfortable. These loans can range from $1,000 to $25,000, depending on your salary and your financial situation. The terms of repayment can range from 1-10 years. Remember that the longer the time and the lower the payments, the more interest you will be paying. Since you are a high risk borrower, repaying such a loan can improve your credit history to a great degree. Timely and regular payments will also make it easier for you to get such a loan in the future should you need it.