A Better Alternative to Letters of Credit

Letters of credit have been around almost as long as commercial trade itself. A letter of credit is a guarantee from the buyer’s bank that states the payment of a buyer’s obligation will be received on time and in the correct amount. Letters of credit take many forms; a standby letter of credit is used for multiple transactions while a commercial letter of credit is used for just one.

Typically, a business will require a letter of credit from a buyer when they're unsure of the risk; specifically, if the buyer is perceived to have a higher risk of non-payment because they are new to the business, and/or if the buyer is foreign.

A commercial letter of credit cost is up to 3% of the total transaction amount, with other letters of credit fees included. 

Why is Trade Credit Insurance a Better Alternative?

Trade credit insurance can remove burdens from buyers and simplify transactions. Businesses that choose credit insurance as a source of finance also benefit from safe sales expansion—domestically and abroad—to new and existing buyers. Transactions are quick and simple. You won’t have to rely on the buyer handling the burden of obtaining a letter of credit from their bank. Rather, you will know they are covered for the sale before the transaction even takes place. And when the unexpected bad debt loss does occur, the business can be confident they’ll be paid.

Using trade credit insurance, you can:

  • Create the means for easy payment that does not impact buyers’ access to credit.
  • Offer open terms and more aggressive credit limits to your customers.
  • Eliminate the need for invoices or shipping documents, unless a buyer defaults on payment.
  • Ensure that payment is based solely on compliance with the contract of sale.
  • Pursue safe sales expansion and gain access to more working capital to recapture the cost of credit insurance.
  • Gain access to more working capital by giving their lender additional comfort in one of their largest assets: their accounts receivable.

Additionally, it’s considerably cheaper than letters of credit, with the cost being absorbed into a smoother transaction rather than presented to the buyer at an additional cost. Credit insurance is an everyday partnership, rather than a one-time transaction with a bank.

Euler Hermes provides credit protection and market insights with risk analysts evaluating current and potential buyers behind the scenes, every day. Our priority is predictive protection.

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