Frequently asked questions

1. What is the difference between a letter of credit and a guarantee?

Letter of credit is a term of payment. It is obligations of the bank to make payment against the commercial documents confirming delivery of goods.

Guarantee is an instrument of security. By issuing a guarantee, the bank undertakes to pay a certain sum of money to the beneficiary of the guarantee in case a customer of the bank has failed to fulfil his contractual obligations, for example, has not paid for the goods, has not fulfilled works or has not rendered services.

2. Is it cheaper to pay by a letter of credit rather than to borrow money from the bank and to make an advance payment?

 Yes, it is cheaper and much safer.

3. How much time does it take for Nordea Bank Finland Plc Latvia branch to issue a letter of credit or a guarantee?

In compliance with the General Terms and Conditions for Issuance of Letters of Credit or the General Terms and Conditions for Issuance of Guarantees the bank shall issue a guarantee or a letter of credit according to customer’s application not later than within 3 business days after arrangement of collateral with the bank. Usually, letters of credit and guarantees are issued within one business day.  

4. Is it possible to pay with a letter of credit if a sales agreement has been already signed and the letter of credit is not stipulated as terms of payment in it?

Yes, it is. A letter of credit by its nature is a separate transaction from a sales contract. Banks by issuing a letter of credit are not bound by sales contract even if a reference to such contract is included in the letter of credit. The bank issues the letter of credit according to a customer’s application. If the beneficiary of the letter of credit performs in accordance with the terms and conditions of the letter of credit, it may be considered as an agreement.

5. Is it possible to use a letter of credit as a security by an exporter for receiving a loan from the bank?

Letter of credit is a bank’s promise to make payment provided the exporter submits the documents complying with the terms and conditions of the letter of credit to the bank. There is a probability that an exporter does not export goods or exports, but the documents do not correspond with terms and conditions of the letter of credit, and the bank is not obliged to make payment. Due to this, a letter of credit may not serve as a security for receipt of a loan from the bank.

In case an exporter’s bank has confirmed a deferred payment letter of credit, the exporter may receive financing from the bank after submitting documents to the bank.

6. If my partner’s bank has issued a bank payment guarantee in my favour, can I receive a loan from my bank?

Guarantees may not serve as a security for the loan. A bank guarantee is the bank’s promise to pay a certain amount to the beneficiary of the guarantee against confirmation of the beneficiary of the guarantee that a principal obligor has not made a payment in compliance with an agreement.

7. My business partner is located in the country X. His bank is bank Y. Is it possible for Nordea Bank Finland Plc Latvia branch to send a letter of credit to that bank?

Nordea Bank Finland Plc has extensive network of correspondent banks in order to send a letter of credit to any bank in any country. 

8. A business partner asks me to make an advance payment. How should I eliminate risk?

In case your partner asks for an advance payment, there is a possibility to agree on a letter of credit. By receiving a letter of credit, your business partner will have the bank’s promise to make the payment. A letter of credit will assure you that your business partner will receive a payment from the bank only after delivery of the goods according to conditions of the letter of credit.