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overdraft against security of Letter of credit

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Mon, 09/06/2010 - 03:59
rpetrie
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Hi all,

I am new to the experience of letters of credit so please excuse my ignorance.

I want to obtain a temporary overdraft facility with my bank using a letter of credit from Italy as security. The payment terms on the Letter of credit may be 120 days and so it is for this reason that I need the overdraft to cover this period.

My bank have advised me that in order for them to use the letter of credit I must deposit the value of the Letter of credit into my account. This makes absolutely no sense to me since I want to borrow against the Letter of credit.

 Please can you advise?

 

Thanks,

Richard

‹ transport document prior to LC issue date Restricted l/c ›
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Tue, 09/07/2010 - 02:09
#1
daveskin283
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Mon, 09/06/2010 - 04:48
#2
LB
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overdraft - LC -more details

To answer your questions could you give us more precise  details:

1. in which country is the issuing bank allocate. if it's a developing country it may play a role.

2. Or maybe the bank is not sure in your creditibility and demands cash cover for the LC; and/or you are not able to provide the sufficient collateral for the creditline/overdraft.

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Mon, 09/06/2010 - 11:56
#3
rpetrie
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overdraft - LC -more details

Hi,

the issuing bank is in Italy. I don't understand why they would need to look at my creditability to much when the security is in the L/C . Furthermore, what is the point of me supplying cash cover when I am trying to raise cash not dish it out. Clearly I don't understand the process.

 Richard 

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Tue, 09/07/2010 - 04:47
#4
Catalyst
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Overdraft against LC

Dear Richard,

The LC gurantees payment only if complying documents are submitted by you, nothing more. The LC is activated only when you submit complaint documents to the nominated bank. Till then it is, in a sense, a piece of paper - not a security for the lending bank.

Till the goods are shipped and complying documents are presented under the credit, the loan/advance is exactly the same as any domestic loan or advance. Such loans carry all the usual risks of domestic loans. Any bank would ask for adequate security to cover the risks against the amount of loan you ask for. 

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Mon, 09/06/2010 - 17:26
#5
sapphirecapital
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hm

Richard, as long as the letter of credit is not received and all the documents which trigger the 120 days to start running the bank will see the lc as possibly not active in the sense that the deal will happen. The advance you want is a loan and there fore a credit decision, the collateral needs to be there.

I advise to look at a back to back scenario.

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