Negotiation with Recourse vs. Negotiation without Recourse — What’s the Real Difference?

Introduction

In export financing, the terms with recourse and without recourse often cause confusion, especially when applied to negotiation under LCs or discounting of drafts under collections. Although both methods provide early funding to exporters, the underlying risk allocation—and therefore the pricing and discounting ratios—are very different.

 Below is Mr. Old Man’s explanation to a reader who asked why banks treat these two types of discounting so differently.

QUESTION

Dear Mr. Old Man,

I would like to know whether the interest rate, fees, discounting ratio, and discounting tenor for bills/documents presented under an LC or under collections differ between negotiation with recourse and negotiation without recourse, and the reasons for such differences.

Please kindly explain.

Thank you very much, Mr. Old Man.

Best regards,

DG

_________

ANSWER

Dear DG,

Thank you for your question. Here’s my response.

Negotiation with recourse for LC documents or collections is essentially an export financing facility similar to a documentary pledge loan. When the proceeds are eventually received, the bank credits the exporter after deducting the advance and negotiation interest calculated on the actual number of financing days.

If, after an agreed period from the due date, the negotiating bank still has not received payment from the issuing bank or the collecting bank, it may exercise its right of recourse against the beneficiary for recovery of the advance and accrued interest.

The negotiation ratio for with-recourse negotiation can be as high as 95%, depending on the compliance of documents and the exporter’s credit standing.

Negotiation without recourse, on the other hand, means the bank purchases outright the beneficiary’s right to payment under the bill of exchange or the documents. If the issuing bank or collecting bank fails to pay, the negotiating bank cannot seek reimbursement from the beneficiary.

The negotiation amount equals the face value of the bill/documentary value minus the negotiation fee.

The negotiation fee is calculated based on:

• the short-term lending rate (sometimes slightly lower), and
• the expected number of days until payment is received.

Examples:

• For sight LCs, banks may assume an expected 10-day funds-realization period.
• For usance LCs, the calculation is based on the tenor or the remaining days of an accepted draft. For instance, if a draft is payable 90 days after B/L date, but the exporter seeks negotiation when only 60 days remain, then interest is calculated on those 60 days.

For LCs available by negotiation at the confirming bank, the confirming bank must negotiate without recourse, provided the documents are compliant.

For LCs available by negotiation at a nominated (non-confirming) bank, the bank may refuse to negotiate—even when documents are compliant—or may choose to negotiate only with recourse.

Regarding collections, banks almost never provide non-recourse discounting of drafts or documents. (For documentary collections, the term “discounting” is more appropriate than “negotiation”).

Why?

• Buyers typically pay or accept drafts only upon receiving documents, which usually happens when the goods reach the port.
• Under D/A, an accepted draft carries no bank guarantee, making non-recourse discounting too risky.
• Only D/P provides any meaningful control, but even then, banks prefer with-recourse structures.

I hope this clarifies your question.

Best regards,

Mr. Old Man