What is a Letter of Credit and what is it used for?
It is a conditioned payment order received by a bank for paying a beneficiary (seller) on behalf of the applicant (buyer) through a correspondent bank, in exchange for the presentation of specified documents verifying shipping or service delivery.
Its purpose is to facilitate foreign and domestic trade, eliminating the mistrust and risk that may exist between buyer and seller.
You may complement this information by opening the section on Letters of Credit, and selecting the modality that you wish to know more about. In addition, you may obtain information regarding the documents required, and download the form to be completed.
What are the different types of Letters of Credit?
- Import/Domestic Letter of Credit.
- Export Letter of Credit.
- Stand-by Letter of Credit.
- On-Demand Guarantees.
What is a Stand-by Letter of Credit?
It is a type of Letter of Credit used as a guarantee, and is executed in the case of failure to comply with a commercial, financial or service-related obligation.
This type of Letter of Credit is generally negotiable at sight in exchange for the presentation of a “Breach of Contract Letter” issued by the beneficiary.
What is the purpose of a Stand-by Letter of Credit?
The purpose of this type of Letter of Credit is to serve as backing (a guarantee) for the beneficiary and to enter into effect in the case of a breach of contract by the applicant.
What are the requirements for issuing a Letter of Credit?
- A line of credit with Bancomext for the issuance of letters of credit, if the amount is above 3 million US Dollars, or 100% of the operation’s value through a cash deposit (provision of funds) plus an additional percentage up to 10% of the appraisal amount.
- Presentation of the firm’s legal documentation required by Bancomext for proper client identification.
- Presentation of a properly completed “Application for Issuance of Irrevocable Letter of Credit,” with the application form provided by Bancomext, or acquisition of services through “B@ncomext Trade,” an online Letters of Credit System.
- Payment of the corresponding commission.
How much time is required to process a Letter of Credit?
After all required documents have been received, the process requires 5 workdays for identification and issuance. Requirements include the original copy of the Application for Issuance form (Format F10), which may be completed and downloaded here, and in the case of provision of funds, the deposit must have been received, together with the corresponding commission.
When a line of credit is used, it must be authorized by Bancomext, the application form must be presented and the payment of corresponding commissions received.
Can Bancomext grant me credit for issuing a Letter of Credit?
You may apply for a line of credit with Bancomext for issuing Letters of Credit if the amount is above 3 million US Dollars.
What is the cost of a Letter of Credit?
The cost varies for each operation. To estimate the cost of an operation, please contact an executive at: email@example.com