Documentary credit: the essential guarantee of secure international payment

Documentary credit mechanisms: letter of credit, compliance and cash flow

A documentary credit, or letter of credit, is an irrevocable commitment given by a banker to a seller, subject to the presentation of documents proving the completion of the transaction. The aim is to offer international financing in which each receivable and each outstanding amount is governed by strict clauses, thus limiting the need for additional financing.

The issuing bank acts as a trusted third party, paying on presentation of documents such as the invoice, bill of lading or certificate of origin. This documentary rigor eliminates the risk of non-payment, while enabling the company to plan its cash flows and meet its own deadlines.

ℹ️ A French industrial equipment company used a credit facility confirmed by BNP to address new markets in Africa: this arrangement securedcash receipts in line with the projected income statement, and avoided unnecessarily burdening the company's current account.

The use of a letter of credit also reassures investors, as the presence of a solid credit facility limits the need for additional equity and optimizes the business plan.

The question then arises: how does receivables financing fit into an overall strategy for working capitalmanagement? To get a clearer picture, it may be useful to consult a guide such as Comment choisir le financement adapté à votre entreprise (How to choose the right financing for your business ), to compare receivables financing, factoring, discounting or bank loans.

Documentary credit, the key to cash-flow security

While the strength of documentary credit lies in the security it provides, it also contributes to the optimal rotation of working capital andsurplus cash. With payment terms often long in international trade, using a documentary credit guarantees both thecollection of customer receivables and the availability of cash to ensure the company's development.

ℹ️ An exporter in the wine sector opted for a credit facility to protect himself against the risk ofnon-payment to a new distributor in the Middle East. His bank, BNP, confirmed payment on presentation of documents, thus avoiding any unnecessary strain on his cash requirements and current account.

The letter of credit is based on a system of trade receivables, the management of which is essential to balance the income statement and anticipate future expenses, whether these relate to the balance of expenses, the payment ofloans or the launch of new projects. Companies that manage to align their trade receivables with their cash flow forecasts combine security and financial dynamism.

This brings us back to the importance of assessing where the real financing needs lie, and understanding how to orchestrate short-term financing, credoc and other levers to avoid the domino effect of longer payment terms. For further information, an article on investment financing provides additional perspectives.

The limits of credoc: costs, constraints and alternatives

Despite all its benefits, documentary credit is not without its drawbacks. Implementation requires extreme rigor in terms of documentary compliance: any anomaly delays or blockscollection, which can put a strain on a company's cash flow.

Bank charges and commissions account for a significant proportion of the transaction. What's more, the obligation to reconstitute a financing file for each new contract puts a strain on production turnaround and working capital management.

ℹ️ A construction company that won an international tender saw its cash flow requirements soar as the release of the creditor payment was delayed: it had to resort to a bridging loan to avoid postponing the worksite, and unexpectedly mobilize a margin on its own funds.

Faced with these realities, many managers are asking themselves: is a credit facility enough to cover the entire need for funds, or should more flexible solutions such asdiscounting or receivables financing be integrated in parallel? For a complete overview of today's alternatives, take a look at our non-bank financing comparison.

The role of credoc in the overall financing and capital management strategy

Opting for documentary credit means reconciling the need for control with a growth strategy. Above all, you need to use this leverage as part of a balanced package that includes cash flow management, optimization of working capital requirements, coverage of trade receivables and monitoring of overalloutstanding amounts.

This approach involves monitoring your forecasts on a quarterly basis, and identifying any gaps between due dates and expected cash outflows: salaries, suppliers, taxes, etc. Some companies opt for invoice discounting or mobilization of their own working capital to anticipate. Some opt for invoicediscounting or mobilization of their own working capital to anticipate.

ℹ️ A family business specializing in leather goods, exposed to the volatility of luxury markets, secured several export contracts by staggering its cash receipts via crédoc, while taking out a medium-term loan to finance the ramp-up of its production. This 360° view of financing requirements has strengthened the company's reputation and opened the door to a new cash surplus.

To secure your entire financing package and never miss out on essentialcash flow, I recommend you rely on solid tools. How to put together an effective financing package details every step, from business plan to working capital projection.

"A company's financial equilibrium must be anticipated, never undergone.

Karmen Loan: agile financing as a perfect relay for credocs

Aware of the rigidity associated with documentary credit, we at Karmen have launched Karmen Loan to offer companies flexible and rapid short-term financing. Our solution can be used to meet urgent cash requirements, to finance inventory or a one-off project before creditcollection, or to manage a backlog of large customer receivables.

Our loans start at €30,000 and go up to €5 million, over 1 to 24 months, to help anticipate payment deadlines, cover outstanding receivables and generate the cash flow needed for operations.

ℹ️ A distributor of electronic appliances activated Karmen Loan while awaiting a secure payment under credit. This advance enabled the company to pay its Asian supplier on time, thus avoiding a stoppage in its turnover and a lengthening of its supplier outstandings.

Karmen offers customized support that can coexist with the issuing bank; we do not intervene in your trade receivables or in the structuring of your equity capital, but act as a facilitator for all your short-term financing needs. Please feel free to explore our dossier on the best short-term financing solutions, to boost your company's cash flow in complete security.

Conclusion

Documentary credit remains a cornerstone of intercultural finance, combining bank guarantees, risk management, working capital coverage and the structuring of each financing package. But the solidity of this lever finds its full effectiveness in synergy with other solutions: borrowing, discounting, mobilization of working capital or innovative products such as Karmen Loan.

Structuring cash flows, projecting forecasts and securing outstandings ensure that your company is never exposed to the vagaries of the international calendar.

If you want to go even further, we invite you to enrich your vision with our complete guide to investment financing, or to delve deeper into the field of non-bank financing solutions.

Your company needs to adapt: well-evolved documentary credit and a modern cash flow strategy are the key to lasting success and a solid surplus, ready for every key development deadline.

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