Sight Letters of Credit (LC) (2024)

Mark Abrams

Mark heads up the trade finance offering at TFG wherehis team focuses on bringing in alternative structured finance to international trading companies.

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Sight LCs – Sight Letter of Credit

Sight LCstands for Sight Letter of Credit, but before we get into the details of the topic, let us find out what letters of credit (“LCs”) are.

Letter of Credit

Letters of Credit includeSight LCsthat rely on underlying documentation. The beneficiary must submit certain documents to the specific bank/s in order to get paid. A letter of credit is typically the document that governs the requirements for payment. Other documentation must prove that the exporter met the obligation towards the buyer.

Think of a letter of credit as a payment tool. However, it is separate from a sales or purchase agreement. A letter of credit helps to ensure that the party on the other end of a deal obliges and performs specific tasks expected of them.

A bank works as an intermediary guarantor for payment and holds the money until it gets proof that the requirements stated in the letter of credit were satisfied. To set up and draft a documentary LC, the party that will make the payment applies for an LC with a local bank of their choice.

What Is a Sight LC?

A sight letter of credit is a document that guarantees the payment against any services or goods that are being delivered. The amount is payable when the party presents theSight LCalong with other necessary documents.

A company offering a sight letter of credit commits to pay an agreed amount of money to the other party when all of the provisions in the LC are met.

This means aSight LCprovides both the buyer and seller in a transaction some level of protection. Plus, it helps decrease some significant risks involved in conducting business, especially if you are dealing with an international client, either buyer or seller.

Always remember, aSight LCwill involve three parties, i.e., seller, buyer, and the bank issuing letter of credit.

How Sight Letters of Credit Work?

It is relatively simple to understand how aSight LCworks. A third party, typically a bank, provides a letter of credit with a guarantee to pay the agreed payment once the other party renders the desired products or services.

Sight LCslist precise conditions when the bank can release the payment to the service provider. These conditions may include certain documentation requirements along with an acceptable timeline for the delivery of goods.

Proof of shipment is one of the required documents to release the payment. The payment requesting party must present this proof directly to the LC issuing bank.

It is important to remember that an LC is a separate document from other negotiated contracts that are part of a business transaction. However, it still requires both parties to agree upon the LC terms and conditions. As a business, you can use it for either national or international transactions.

However, parties mostly use an LC for international sales transactions. Why? It protects both buyers and sellers and moves the risk away from them, by having an intermediary bank involved in a business transaction from start to finish.

When a Sight Letter of Credit Becomes Due?

ASight LCbecomes payable as soon as the beneficiary provides the required documents to the bank, fulfilling the conditions of the sight letter of credit. However, the bank gets a reasonable time to process the requested payment. This time typically goes up to five business days.

The required documents may include either proof of delivery or proof of shipment for the products purchased by a buyer, as aSight LCprotects both buyer and seller by decreasing any risk involved in international trading. If a seller expresses any concerns about receiving their payment, they can demand aSight LCas it will become an insurance policy.

One of the most common examples of the effectiveness of sight letters of credit is as follows:

A business owner can present aSight LCalong with a bill of exchange to a lender and walk away with all the necessary funds on the spot. This makesSight LCsan important document in the trading arena, and it enjoys more popularity than any other type of letter of credit.

Difference between Sight LC and Time LC

A lot of business owners get confused betweenSight LCand time letter of credit. Although both require certain documents, and both are common practice within the trading arena, there is a slight difference between the two.

A sight LC becomes due as soon as the beneficiary presents the proof of delivery or proof of shipment, and other ancillary documents. On the other hand, a Time LC needs certain days to pass after submitting a letter of credit, proof of delivery or shipment, and other required documents, before the payment becomes due.

There are several advantages of a sight letter of credit, such as:

Efficient Working Capital Management for the Seller
The sellers get the flexibility to manage their working capital with efficacy. One of the most lucrative advantages of a Sight LC is that the seller can expect to receive the payment against the products quickly and as soon as the shipment of goods is on its way.

Consequently, the seller will not have to experience a cash crunch; and so the seller can efficiently manage his working capital.

Early Payment Benefits
Sight letters of credit come with an interesting benefit for the seller. Typically, a business uses a working capital loan or an overdraft facility to manage their working capital. This scenario becomes inevitable when the seller extends a credit period to a buyer. The credit period may be for a duration of 15 to 90 days. This extension of credit and thus cash gap is not relevant where there is an LC, as a Sight LC guarantees that the seller will get paid earlier.

Competitive Advantage for the Buyers
As a buyer does not take any credit period from the selling party, they are in a better position to negotiate competitive prices and terms with a seller. This gives a competitive edge to the buyer in the trade market.