What is an advising bank?
An advising bank helps with trade deals between buyers and sellers in different countries. The advising bank works for the exporter, who is the seller. The bank ensures the exporter gets paid for the goods they send to the importer, the buyer in another country.
The role of an advising bank
The main job of the advising bank is to look at the letter of credit from the issuing bank. The issuing bank works for the importer. The letter of credit is a paper that says the issuing bank promises to pay the exporter the right amount of money after the exporter sends the goods to the importer.
The advising bank helps the exporter understand the letter of credit. The advising bank checks that the letter of credit is accurate and correct. They tell the exporter about any problems with the letter of credit. The advising bank may also help the exporter meet all the conditions in the letter of credit to get paid.
How advising banks help exporters.
They advise providing essential services to exporters and a liaison between the porter and the issuing bank in the importer’s country.
The advising bank knows about banking rules and laws in different countries. They help ensure that the letter of credit meets all the proper standards, which protects the exporter and lowers the risk of not getting paid.
Having an advising bank look at the letter of credit gives the exporter more confidence. The exporter knows the letter of credit is legitimate, and they know the issuing bank will pay them if they do everything the letter of credit requires.
The advising bank may also help the exporter understand the terms and conditions in the letter of credit and advise the exporter on the documents they must give to the bank to get paid. These documents could be bills, invoices, or certificates that prove the exporter shipped the correct goods in the right way.
When to use an advising bank
Exporters often use advising banks when they sell goods to buyers in other countries. Selling things internationally has more risks than selling within your own country. The exporter and importer may not know each other well, and their countries could have very different laws and banking systems.
Using an advising bank helps lower these international trade risks. The advising bank is usually in the same country as the exporter. This means the exporter is working with a bank they know and trust.
The advising bank then works with the issuing bank in the importer’s country. The advising bank doesn’t promise to pay the exporter itself, but it checks the letter of credit from the foreign issuing bank to ensure it is legitimate.
Exporters are most likely to use an advising bank if:
- They haven’t worked with the importer before
- The importer is in a country where the banking and legal systems are not familiar or not trusted
- The export deal is large or complex, with many requirements to get paid
- The exporter wants extra protection and expertise to make sure they will get paid
Advising bank fees
They are advising banks to charge fees for their services. The main fee is usually the advising fee for looking at and authenticating the letter of credit. This is often a flat fee rather than a percentage of the amount.
Some advising banks may also charge other fees, such as handling fees for processing documents the exporter needs to give them or amendment fees if the letter of credit has to be changed.
The exporter usually pays these advising bank fees. Sometimes, the costs are paid from the money the advising bank gets from the issuing bank to pay the exporter. Other times, the exporter pays the fees directly to the advising bank.
Exporters should always ask an advising bank about all their fees upfront. They need to include these fees in the price they charge the importer. The fees may seem small, but they can increase and lower the exporter’s profits if they don’t plan for them.
Advising bank vs. confirming bank
An advising bank is not the same as a confirming bank. The confirming bank takes on more risk. It promises to pay the exporter separately from the issuing bank.
The confirming bank will pay the exporter even if the issuing bank can’t or won’t pay. This gives the exporter extra protection, but confirming banks charge additional fees. They usually also take a more significant cut of the payment.
They advise banks not to confirm letters of credit. They authenticate the letter of credit from the issuing bank, but they don’t make any payment promises themselves.
Exporters can choose to use an advising bank instead of a confirming bank. This option costs less but carries more risk. Exporters must trust that the issuing bank will pay them if they follow the letter of credit terms.
How to work with an advising bank
Choosing an advising bank
Many exporters use their regular business bank as their advising bank for international trade deals. Business banks are used to offering this service to their customers who export. They will often have special international trade teams to handle letters of credit.
The exporter’s bank may have relationships with many foreign banks. This helps them advise on letters of credit from those banks. They will know the banking laws and systems in the countries where those issuing banks operate.
For huge export deals, it can sometimes make sense for the exporter to choose an advising bank other than their regular bank. They may find a different advising bank aligned with the importer’s country or industry or an advising bank with character. However, using the regular business bank is the simplest option for most exports.
Asking an advising bank to review a letter of credit
The first step for an exporter to use a letter of credit is to ask their advising bank to look at it. The exporter should send their advising bank a copy of the letter of credit as soon as they get it from the importer.
The advising bank will then check that the letter of credit is authentic and ensure it has all the correct information, signatures, and codes from the issuing bank.
The advising bank will also read through the letter of credit carefully. They will check the exporter can meet all the terms and conditions to get paid. If there are any problems, they will advise the exporter.
This review process can take a few business days. The exporter should give the advising bank the letter of credit well before they plan to ship any goods to the importer. That way, if the advising bank spots any issues, there is still time to amend the letter of credit.
Following advising bank instructions
If the advising bank is happy with the letter of credit, they will tell the exporter they can proceed with the export. The advising bank will give the exporter clear instructions on what they need to do.
The exporter must follow these instructions strictly. If they don’t, they risk not getting paid. A slight mistake can mean the issuing bank refuses to pay out on the letter of credit.
Standard instructions from the advising bank include:
- What documents does the exporter need to give the advising bank after they ship the goods, and how long do they have to provide them
- How the export should be described on the invoice and other documents – if this doesn’t match the letter of credit, it can cause payment problems.
- Requirements for inspection certificates, insurance, or other specific documents needed to get paid
The exporter should ask their advising bank if anything in the instructions is unclear. It’s better to check than to risk expensive misunderstandings.
Once the exporter has shipped the goods and given all the proper documents to the advising bank, the advising bank sends these on to the issuing bank. As long as everything is in order, the issuing bank sends payment to the advising bank. Finally, the advising bank pays the exporter minus any fees.
