International trade is increasingly common in business. Not all foreign businesses use the same banking systems as the United States, however. In order to increase trust among companies in different countries, letters of credit are often used. A letter of credit is one way of guaranteeing that funds are available, and provides reassurance that money will be sent after a shipment occurs. While some letters of credit expire after a short time, evergreen letters of credit are long term documents that stay active unless cancelled.
An evergreen letter of credit is a legally binding document issued by a bank or other financial institution. It provides a guarantee the funds for a purchase are available, and promises money will be transferred after a shipment is complete. A letter of credit is typically provided by the bank of a buyer and given to the seller of a good or service, and is often used to decrease the transaction risks during international trade. Unlike a standard letter of credit, an evergreen letter does not have a preset expiration date.
An evergreen letter of credit includes information regarding a specific shipment of goods or delivery of services. A maximum amount of credit is written in the letter, and the money provided by the bank cannot exceed this amount. The letter of credit also contains a list of shipping documents required in order for the credit to be paid. For instance, the letter may require a signed shipping invoice and signed bill of lading. These documents must be presented as proof that shipment has occurred before money will be transferred.
Evergreen letters of credit are usually active for a minimum term of one year and cannot be terminated before this time. While standard letters of credit can contain an expiration date, an evergreen letter includes a provision or clause that limits the terms of expiration. An evergreen clause allows the letter to automatically renew, unless proper termination steps are followed. This provision eliminates the need for multiple letters of credit, and is useful when a company is conducting ongoing business over an undetermined length of time.
Evergreen letters of credit automatically stay active unless the proper expiration steps are followed. In order for a letter of credit to expire, the issuing bank is required to notify the beneficiary of the cancellation. The letter must stay active for a minimum of 30 days after this bank notification. This grace period allows the holder of the letter to finalize any outstanding shipments and transactions before the letter becomes inactive.
