News

October 30, 2009

Government guarantee scheme to secure payment for exporters

Small firms exporting to emerging markets are now more likely to be able to get their bank to guarantee a letter of credit from an overseas customer, following the launch of a Government-backed scheme.

Small exporters that want a guarantee that customers abroad are not going to default on payment can ask them to provide a letter of credit from their bank, guaranteeing payment.

But if the exporter is unfamiliar with the overseas bank, for example because it is based in an emerging market, they may want their UK bank to confirm the letter is genuine and to guarantee the payment (for a fee).

Due to current economic conditions, UK banks are reluctant to provide the guarantee. As a result the Export Credits Guarantee Department (ECGD) has launched the Letter of Credit Guarantee Scheme, so that the Government shares the risk of confirming letters of credit with five banks — Barclays, RBS, HSBC, Lloyds TSB and Standard Chartered.

This guarantee is available to firms exporting to emerging markets including Brazil, India, China and Croatia, which tend to be riskier, but not to richer economies such as the EU and North America," said ECGD spokesman, Steve Roberts-Mee. "These confirmed letters of credit are about the most secure form of payment guarantee you can get. The firm pays its fee for the confirmation and if the buyer or the foreign bank doesn't honour the deal, their bank will pay the bill.

"Under this scheme, more small firms will have the extra security that a confirmed letter of credit gives them," said Roberts-Mee. "Letters of credit tend to be used for short-term payment and smaller amounts, so they are used more by small and medium-sized businesses than by larger companies."

Confirmation of letters of credit may still be refused if the market the firm is entering or the customer or bank they are dealing with is considered too risky.

The Federation of Small Businesses (FSB) public affairs spokesman, Stephen Alambritis, said the scheme would encourage more firms to take advantage of opportunities abroad.

"Firms may find that there is more demand abroad than at home at the moment, but they could well be put off by the uncertainty of trading in unknown markets," he said. "The guarantee on letters of credit will encourage banks to give more security to firms who want to benefit from trading globally."

The scheme will run until 31 March 2011. Firms interested in having letters of credit confirmed should approach their bank.

• For more information on letters of credit, visit international trading consultancy SITPRO's website