Government’s Export Credit Guarantee Department (ECGD) today launched a letter of credit guarantee scheme to assist UK exporters by boosting the availability of short-term export finance.
Banks in many countries issue a confirmation letter of credit which guarantees that a company will receive the money it is owed for goods. The EGCD will validate the letters to UK banks in order to give them the confidence to provide the company that has been served it short-term export finance. The government agency will share up to 90% of the risk on individual letters of credit.
Five banks – Barclays, RBS, HSBC, Lloyds TSB and Standard Chartered – are supporting the scheme and will be making arrangements in the coming weeks to allow exporters to participate. It will cover 282 overseas banks in 36 export markets. More banks and export markets are expected to be added to the scheme.
UK Minister for Trade, Investment and Small Business Lord Davies of Abersoch said: “I believe this new scheme could provide real help to UK exporters, particularly smaller companies exporting to emerging markets, which is where letters of credit are most used and where new opportunities can be found.
“Letters of credit are a very well established method of securing payment and an alternative to credit insurance. This scheme should increase banks’ capacity, and is an excellent step forward.”
The scheme will run until 31 March 2011. It will not cover exports to areas where credit letters are not commonly used, including the EU, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland or the United States.
EGCD said the scheme will be most effective in reducing the risk from companies evolving economies which are most likely to default on payments.