A letter of credit is simply a guarantee document from a bank or financial institution, ensuring that a seller will receive a payment due from a buyer on time and for the correct amount. But the seller will not be paid until the bank receives a confirmation that the goods have been shipped for buyer.
A letter of credit is simply a guarantee document from a bank or financial institution, ensuring that a seller will receive a payment due from a buyer on time and for the correct amount. But the seller will not be paid until the bank receives a confirmation that the goods have been shipped for buyer.
A letter of credit is simply a guarantee document from a bank or financial institution, ensuring that a seller will receive a payment due from a buyer on time and for the correct amount. But the seller will not be paid until the bank receives a confirmation that the goods have been shipped for buyer.
What is Letter of Credit? A letter o% $redit is sim#ly a guarantee do$ument %rom a "an& or 'nan$ial institution, ensuring that a seller !ill re$ei(e a #ayment due %rom a "uyer on time and %or the $orre$t amount. But the seller !ill not "e #aid until the "an& re$ei(es a $on'rmation that the goods ha(e "een shi##ed %or "uyer. So a letter o% $redit is "asi$ally a guarantee %rom a "an& "an&)s !ritten #romise !ritten $ommitment to #ay Why use a letter of credit? etters o% $redit are most $ommon in international transa$tions. *m#orting and e+#orting %rom one $ountry to another in(ol(es ris&s. E+#orters %a$e ris& o% "uyers %ailing to #ay %or goods and im#orters ris& #aying "ut ne(er re$ei(ing anything, though "oth #arties ha(e an agreement or an underlying $ontra$t. There are other %a$tors in(ol(e in international dealing su$h as distan$e, di,erent la!s, di-$ulty in &no!ing ea$h other #ersonally. *n this $om#le+ situation the use o% etters o% $redit is (ery im#ortant in international trade. Both #arties need guarantee %or re$ei(ing goods and #ayment. So etters o% Credit !or& as a tool to redu$e ris& %or "uyers and sellers. etter o% Credit./o$umentary Credit Advantages for buyers: Seller !ill not "e #aid until the "an& re$ei(es a $on'rmation that the goods ha(e "een shi##ed %or "uyer. The "an& !ill #ay the seller %or the goods only !hen all the terms & $onditions !ill %ul'l a$$ording to the etter o% Credit. This assuran$e #ro(ides se$urity to "uyer %or %uture "usiness #lan. etter o% Credit redu$es ris& o% #oor #er%orman$e "y the seller. The "uyer $an $ontrol the time #eriod %or shi##ing o% the goods. By a letter o% $redit, the "uyer demonstrates his sol(en$y. *n the $ase o% issuing a letter o% $redit #ro(iding %or delayed #ayment, the seller grants a $redit to the "uyer. 0ro(iding a letter o% $redit allo!s the "uyer to a(oid or redu$e #re1 #ayment. Shi#ment under etter o% $redit is treated !ith most $are to meet deli(ery s$hedule and other required #arameters "y the e+#orter. The letter o% Credit $reates $onsidera"le #ressure on the seller to su##ly the goods !ithin the s$heduled time and !ith the required quality Advantages for sellers: By the etter o% Credit the seller is reassured %or re$ei(ing #ayment in %ull and on time. The ris& o% non1#ayment is trans%erred %rom the seller to the "an&. The seller $an use etter o% Credit as a guaranty %or his o!n su##liers. Based on a high quality e+#ort letter o% $redit, seller $an o"tain a loan %rom "an&. When to use a letter of credit O% $ourse etter o% Credit is (ery use%ul, "ut it2s o%ten "est to a(oid using one %or a transa$tion. They $an sometimes result in e+#ensi(e delays, "ureau$ra$y and une+#e$ted $osts. Letter of Credit from Importer: 3ou should #ro"a"ly only $onsider o#ening a letter o% $redit as an im#orter4 *% your su##lier insists. *% national e+$hange $ontrols require. Letter of Credit for Exporter: Ma&e sure you ha(e a $lear #oli$y in your "usiness a"out !hen to $onsider using a etter o% Credit. Thin& $are%ully a"out !hether or not you need to as& an o(erseas $ustomer %or a letter o% $redit. *m#ortant things to $onsider4 egal matters 1 does the $ountry you2re e+#orting to require one5 Costs 1 does the (alue o% the order 6usti%y the "an& $harges and e+tra $osts in(ol(ed, and !ho #ays these $osts5 The $ustomer2s $redit!orthiness 1 do they ha(e a tra$& re$ord !ith you5 Ris&s asso$iated !ith the $ountry you2re e+#orting to 1 is it #oliti$ally sta"le !ith a good re#utation as an international trading #artner5 7ormal trading #ra$ti$es 1 is it standard #ra$ti$e %or e+#orters to use letters o% $redit !hen trading !ith that $ountry, and.or in that #arti$ular $ommodity5 A(aila"le ad(i$e and guidan$e 1 "an&s may re$ommend using o% a letter o% $redit in $ertain trading situations regardless o% other %a$tors, !hile $redit insurers sometimes insist on it. *% you do de$ide that a letter o% $redit is the "est o#tion you2ll need to $onsider !hi$h ty#e o% letter to use. A 8$on'rmed and irre(o$a"le2 letter o% $redit is the most se$ure ty#e. Other important things to consider: Ban& ma&e $harges %or #ro(iding etter o% Credit, so "e a!are o% the additional $osts in(ol(e in using a etter o% Credit, it2s sensi"le to !eigh u# $osts against the se$urity "ene'ts. *% you2re an e+#orter you should "e a!are that you2ll only re$ei(e #ayment i% you &ee# to the stri$t terms o% the letter o% $redit. 9sing a letter o% $redit $an sometimes $ause delays and other administrati(e #ro"lems. itfalls of Letters of Credit etters o% $redit ma&e it #ossi"le to do "usiness !orld!ide. They are im#ortant and hel#%ul tools, "ut you should "e $are%ul !hen using letters o% $redit. As an e+#orter, ma&e sure you4 Care%ully re(ie! all requirements %or the letter o% $redit "e%ore mo(ing %or!ard !ith a deal. 9nderstand all the do$uments required. Are truly a"le to get all the do$uments required %or the letter o% $redit. 9nderstand the time limits asso$iated !ith the letter o% $redit, and !hether they are reasona"le. :no! ho! qui$&ly your ser(i$e #ro(iders ;shi##ers, et$< !ill #rodu$e do$uments %or you. Can get the do$uments to the "an& on time. Ma&e all do$uments required "y the letter o% $redit mat$h the letter o% $redit a##li$ation e+a$tly ;e(en ty#ogra#hi$al errors or $ommon su"stitutions $an $ause #ro"lems<. !o" to get a Letter of Credit 3ou need to $onta$t your "an& to get a letter o% $redit. 3ou !ill most li&ely need to !or& !ith an international trade de#artment or $ommer$ial di(ision. 7ot e(ery 'nan$ial institution !or&s !ith letter o% $redit, "ut small "an&s and $redit unions o%ten re%er you to some"ody !ho is a"le to a$$ommodate your needs.