Letter of Credit vs. Trade Credit Insurance: Analyzing Best Practices for Your Importing Business

by Axton Global
Cargo Ship Import from China
Approximately 13.3% of imports in the US originated in China at the beginning of 2023. Importing goods is a fundamental requirement for many US businesses that sell products to customers. If your business needs a contingency plan or assistance for the cost of goods from exporters, you have a couple of options available. You may choose between a letter of credit (LOC) and trade credit insurance.

Each of these options provides unique advantages to your importing business and are suitable for different reasons. In which situations should you choose an LOC, and when is trade credit insurance the perfect choice? This article will describe the benefits and drawbacks of each and give suggestions about when you might use them.

What is a Letter of Credit?

As an international importer looking for payment options, you may wonder, “What is letter of credit?” The simple answer is that these are payment options for importers that help you receive quality goods without trade risks from your exporter.

You may want to know, “How does letter of credit work in international trade?” You will find that once you make an application to your bank and receive an LOC, they will send the document to the exporter’s bank to provide a guarantee that you will pay for the goods. This payment will happen despite the lag between shipment and receipt. Your business is protected if the goods are damaged or lost during transit.
How to Defer Payment to Chinese Suppliers
With Sinosure insurance, you can get 120-days trade credit for your import from China.

Letter of Credit Definition

If you have been looking for an LOC definition, it is a document that your bank will issue to the exporter’s bank overseas. The document is the written guarantee. It provides specific conditions under which you will provide payment. Several types of letter of credit for international trade are available, including standby letter of credit (SLOC) options, transferable LOC payment methods, and irrevocable LOC options.

If you are unable to pay your supplier, your issuing bank will cover your balance and pay on your behalf. In this case, you must still repay the bank to avoid becoming indebted or facing financial consequences.

What is the Cost of a Letter of Credit?

Multiple factors affect the cost of an LOC, including issuing, advising, confirming, and transmission, legal, and amendment fees. Each fee adds up. Your bank’s issuing fee might range from 1% to 10% of the LOC cost each year. This can depend on the level of financial risk or creditworthiness your business poses the bank.

Your business may face advising fees if the beneficiary reviews the precision and validity of the SLOC. An estimation of these advising fees can be between 0.1% and 0.25% of the SLOC’s value.

Regarding the confirming bank fees, the costs can vary. The exporter’s bank may first evaluate the economic stability of your bank’s country. High stability can lead to lower fees; low stability can lead to high fees.

What Are the Advantages and Disadvantages of Letter of Credit?

It is important to understand the advantages and disadvantages of LOC options. Knowing the pros and cons ensures you know whether this payment method matches your business and its budget. Check the information in the table below to discover the main pros and cons.

What is Trade Credit Insurance: Trade Credit Insurance Definition?

Trade credit insurance is a safeguard against non-payment risks for exporters. This arrangement typically involves your company and an insurance company. It requires you to apply to the insurance company, submit your business financial reports, and agree to a creditworthiness assessment. Once you have been approved for and purchased insurance policies, you can pay for goods from the exporter.

You may also need to know, “What does trade credit insurance cover?” For this trade insurance, the provider will pay the exporter by recovering the debt if your business doesn’t pay the exporter on time. Therefore, this arrangement covers insolvency, default on payments, and disputes between your business and exporters.

Several types of trade credit insurance are available. An example is export credit like SINOSURE, which protects exporters or sellers in China from non-payment.

How Much Does Trade Credit Insurance Cost?

The cost of trade insurance can differ in various situations. A few factors that affect the cost include the value of the contract, the size of your insurance policy, and the country from which you make the imports. Additional factors, such as the economic stability of the country from which you import goods, can also affect the cost. However, the average price for this insurance type starts from 0.5% of all the invoices. The trade credit insurance cost may be as high as 1.5% of all the invoices.

What Are the Advantages and Disadvantages of Global Trade Credit Insurance?

Understanding the advantages and disadvantages of global trade credit insurance can help you know what to look for when choosing a policy. Consider the pros and cons we have included in the table below for more information.

Letter of Credit vs Trade Credit Insurance: Which is Ideal for Your Business?

Your business may benefit from LOCs and trade insurance in unique circumstances. If you are importing goods from an unfamiliar supplier, you may prefer an LOC that eliminates the chances of non-delivery. If you need to make very high-value transactions and require assurance of the quality of the goods, an LOC can also provide a secure guarantee that the exporter will deliver them in line with the specific terms in the document.

Alternatively, if you are trading with several suppliers or have long-lasting trade relationships with exporters in China, a trade insurance method can enhance that trading relationship with increased trust between you. If you require flexible, extended payment conditions, a trade credit method is ideal. For example, companies such as SINOSURE can help you gain extended payment conditions of up to 180 days. It is an example of credit insurance that can enhance your cash flow.

Discover Accessible Trade Credit Insurance from Axton Global

As a business that needs a cost-effective contingency plan for the cost of goods, a trade credit insurance option can help significantly. At Axton Global, we have the tools and financial experts to help you gain credit insurance advantages from SINOSURE and delayed payment conditions.

Our professionalism and extensive knowledge can make the application for trade credit insurance easier. Visit Axton Global for a wealth of information on this process from our knowledge base. Alternatively, book a consultation with our professionals to start trading today.

We help importers from all over the world to improve their trading terms with Chinese suppliers and extend payments to the supplier for 90 to 120 days using the Sinosure credit insurance tool

We help companies to obtain a new Sinosure credit limit, increase existing credit and provide comprehensive consulting services regarding Sinosure credit insurance
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