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Does your business need L/Cs?

Updated: Mar 4


An L/C or Letter of Credit is a document that is issued by your bank, or a bank that is acceptable to your supplier, undertaking that they will be paid after you have correctly shipped the goods ordered. It provides assurance to your supplier, and it provides assurance to you that you will not have to pay for goods not complying to the specifications required.

It is most often needed when your supplier is abroad and is not willing to take the risk that that you will pay promptly. It obviously does not apply if you need to pay in advance, or the 'goods' are virtual and instantly 'delivered' after payment.

The bank takes a risk on you, in that when it pays your supplier, you will have the resources to pay the bank back. That is why banks often requires up to 100% of the value of the L/C before they issue the L/C.


Following a trade contract between a buyer and a seller, the buyer approaches his bank (Issuing Bank) to issue an L/C to the advising bank in favor of the Seller. If the Issuing Bank is comfortable with the credit of the Buyer, it issues the L/C to the Advising Bank. Once, the supplier is informed of the L/C, to accepts the order and proceeds to complete the order. When the Supplier ships the goods and forwards the "Bill of Lading", evidencing shipment to the Advising bank, the Advising Bank, after checking the shipping documents, will pay the seller. The issuing bank will then pay the advising bank and draw the funds from the Buyer's account or will need to extend a short-term loan to the Buyer.

The Buyer pays for the L/C because it offers several benefits that allow or facilitate the transaction with the Seller. These include:

1. Risk Mitigation: Developing economies often face higher risks in international trade, such as political instability, weak legal systems, and creditworthiness concerns. LCs provide a secure mechanism for mitigating these risks by ensuring that payment is made only upon the fulfillment of specified conditions.

2. Credibility Enhancement: LCs enhance credibility for businesses in developing economies, especially when dealing with unfamiliar or less-trusted trading partners. By involving reputable banks as intermediaries, LCs provide assurance to both buyers and sellers that their interests will be protected, thereby facilitating trade.

3. Access to Financing: Developing economies often struggle with limited access to financing. LCs enable businesses to obtain trade finance from banks, allowing them to bridge the financial gaps and engage in international trade activities that would otherwise be challenging.

4. Standardization and Uniformity: LCs operate based on internationally recognized rules, such as those outlined by the International Chamber of Commerce (ICC) in their Uniform Customs and Practice for Documentary Credits (UCP). This standardization ensures a predictable and transparent framework for trade transactions, which is particularly valuable in developing economies with less-established legal systems.

5. Import and Export Facilitation: LCs simplify import and export processes by streamlining documentation requirements. By clearly defining the terms and conditions of the transaction, LCs help reduce disputes and delays, making it easier for businesses in developing economies to engage in international trade.

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Hence, letters of credit are more prevalent in developing economies because they address the challenges faced by businesses in these economies. Businesses in Western countries, appear not to have these issues and do not appear to use L/Cs.

We guess that is why the current accounting or financial apps available take account of L/Cs.


Trafic recognizes the continuing need for L/Cs in developing countries and the need for trading businesses in these countries to work out what L/C faciities they need and how to quantify the facility they need to banks.

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Key problems include:

  1. Error-Prone Calculations: Excel is susceptible to human errors, especially when dealing with large datasets and complex formulas. A simple typo or misplaced cell reference can lead to significant miscalculations, potentially resulting in flawed financial models. These errors can have serious consequences, leading to incorrect financial decisions and misleading projections.

  2. Lack of Version Control: Excel lacks robust version control capabilities, making it difficult to track changes and maintain an accurate audit trail. When multiple users collaborate on a financial model, it becomes challenging to keep track of revisions, leading to confusion and potential data integrity issues. This lack of version control can hinder transparency and increase the risk of errors going unnoticed.

  3. Limited Scalability: Excel has limitations when it comes to handling large datasets and complex calculations. As financial models grow in complexity, Excel's performance may suffer, leading to slow calculations and increased processing time. This limitation can hinder the ability to analyze and make timely decisions based on the model's outputs.

  4. Inflexibility and Lack of Automation: Excel requires manual input and formula adjustments, making it time-consuming and prone to human error. Financial models built on Excel often lack the flexibility and automation capabilities needed to adapt to changing business scenarios. This inflexibility can hinder the ability to perform scenario analysis and make quick adjustments to the model.

  5. Data Integrity and Security Risks: Excel files are vulnerable to data corruption, accidental deletions, and unauthorized access. Without proper data protection measures, financial models built on Excel can be exposed to security risks, compromising the integrity and confidentiality of sensitive financial information. This poses a significant concern, especially for organizations dealing with confidential data.

What alternatives do businesses have?

  1. Building cashflow projections from budgets, especially for trading businesses, requires relatively few assumptions, but a lot of complex calculations. And for a variety of reasons, none of our friends in trading business had built a model to project cashflows and balance sheets.Use the budget to estimate the year-end balance sheet and add 50% to the borrowing requirement. Use EBITDA as a cashflow alternate, and assume working capital remains constant over the year The funding requirement is then the balancing figure, after increasing shareholder funds with the amount of profit

  2. Download historic data using various apps and extrapolate forecasts, based on historic relationships between income and balance sheet items. This does suffer from trying to explain what business assumptions have been used to project the balance sheet and the difficulty of introducing new products, new markets in new business plans.

  3. Use various other apps that promise to make building and maintaining financial models much easier than having to build a model from scratch in Excel. Which one works for you is a matter of trial and testing and takes time and effort.

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None of the alternatives above take account of letters of credit, the time taken between ordering your goods and having them ready for sale or allow you to restructure your capital , so that both you , your investors and your bankers are comfortable with the level of risk.

Trafic started out as a very complex Excel model, but in addition to addressing all the issues listed above, we designed it such that it would be both simple and easy to use by decision makers themselves. That it should work with only with assumptions that make sense to business owners and managers. That is should not require downloading data, that it should not require any systems or implementation time and costs, that it should not require any customization or trial periods. That it should be as simple as a calculator, albeit with a few more inputs.

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