Financing your deals, simple explanation of Letter of Credit (LC) in the plastic industry

A Letter of Credit is a bank guarantee that ensures sellers will get paid and buyers will get their goods, reducing risk in international trade.

How It Works:

Basic Process:

• The buyer's bank promises payment
• The seller ships goods
• The documents are submitted to the bank
• The bank checks the documents
• The payment is released to the seller

Required Documents:

• A commercial invoice
• A bill of lading
• A packing list
• The certificate of origin
• The quality certificates
• The insurance documents

Bill of Lading (BOL): A legal document issued by a carrier that details the type, quantity, and destination of goods being transported. It serves as a receipt, a contract of carriage, and a document of title to the goods.

Packing List: A document that lists all items included in a shipment, including quantities and details of how they are packaged. It accompanies the shipment and is used for checking and verifying the contents upon delivery.

The commonly used types of Letter of credit:

Sight Letter of Credit:

• Payment is done at document presentation
• Quick payment for seller
• It is common for spot orders
• Standard in resin trade

Spot Order: A purchase order for immediate delivery and payment of goods or services at the current market price, as opposed to future or forward contracts.
Resin Order: A purchase order specifically for plastic resins (raw plastic materials in pellet or powder form) used in manufacturing plastic products. These orders typically specify the type, grade, and quantity of resin needed.

Usance Letter of Credit:

• Payment is done after set period
• A period of usually 30-90 days
• It is a good point for buyer's cash flow
• Common for regular orders

Practical Example: 

For $100,000 resin order:

• The buyer opens LC
• The seller ships material
• The documents are submitted
• The bank verifies the documents
• The payment is released

Key Benefits:

• Payment security
• Risk reduction
• Bank guarantee
• Trade confidence
• Document control

Important Considerations:

• Bank fees
• Document accuracy
• The shipping terms
• Time constraints
• The different compliance requirements

Real-world example of a Letter of Credit in the plastic industry:

US Company buying resin from Saudi supplier.

LC Details:

• Amount:      $240,000
• Material:     HDPE Injection Grade
• Quantity:    200 metric tons
• Price:           $1,200 per ton FOB (Free On Board)
• Shipment:   30 days from LC opening
• Payment:    At sight

HDPE Injection Grade: A (high-density polyethylene) plastic material specifically formulated for injection molding processes, commonly used to make containers, bottles, and plastic parts. It has high flowability and good stiffness.
Payment at Sight: A payment term requiring immediate payment when documents (like a bill of exchange or draft) are presented to the buyer. Payment must be made when the documents are "seen" rather than at a future date.
bill of exchange simple and quick definition
Bill of Exchange: A written order that binds one party to pay a fixed amount of money to another party on demand or at a predetermined date. It's like a written promise to pay, often used in international trade.

FOB (Free On Board) is a shipping term that means the seller is responsible for delivering goods to a specific shipping point, after which the buyer assumes all costs and risks. It's commonly used in international trade and shipping contracts.

The Step-by-step process:

Opening LC:

• US buyer requests LC from their US bank
• Bank issues LC to Saudi bank
• Saudi bank notifies supplier
• LC amount:   $240,000
• Bank fee:       ~$2,400 (1%)

Required Documents:

• Commercial invoice
• Bill of lading
• Material test certificate
• Certificate of origin
• The packing list
• The insurance certificate

Timeline Example: 

• Day 1:     LC opened
• Day 15:   Material shipped
• Day 20:  Documents to bank
• Day 25:  Documents checked
• Day 30:  Payment released

Critical Points:

• Exact material specification
• Shipping deadline must be mentioned
• Document must be accurate
• Quality parameters must be clear and detailed
• Payment terms must be clear

Total Cost Breakdown:

• Material:                      $240,000
• LC fees:                        $2,400
• Swift charges:             $150
• Document handling: $250
• Total:                            $242,800

This shows how LC secures both the buyer and seller in international plastic trade.