Commercial letters of credit (L/Cs) payable at sight could help boost trade between sellers in developed markets and buyers in emerging markets according to vice president, trade & working capital sales, EMEA at J P Morgan.

Henrikas Kotenkovas says that such L/Cs could be incorporated in the risk mitigation tools used by corporates to avoid lost sales, credit write-downs and economic uncertainties.

Currency management

Many developing countries manage their currency in line with the US dollar since it is the most frequently used currency in global trade. But monetary policy changes that benefit the US economy do not always benefit countries in emerging markets says Kotenkovas.

With a tightening monetary policy, liquidity can become scarce because of capital outflows. Importers are, therefore, unable to raise funds for purchases, which can result in lost sales for sellers in more developed countries he adds.

Preferential terms

Kotenkovas suggests a commercial L/C payable at sight can help increase sales and mitigate risks for the buyer, and the seller can help raise a required US dollar amount for purchases.

Proposed by the seller, this could give the buyer access to the seller's capital markets and longer payment terms, which could help the seller when negotiating commercial contract terms and conditions he concludes.

Henrikas Kotenkovas' insight, Why working capital can be a treasurer's friend, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.