Letter of Credit
A Letter of Credit is a payment instrument/ payment guarantee letter issued by the bank on behalf of the buyer to ascertain the beneficiary that the said amount will be paid by the buyer on a stipulated date.
To obtain a letter of credit, the applicant/buyers/importer must submit all the relevant details, like payment amount, date, details of the beneficiary, etc. Banks issue the international letter of credit based on a pledge for securities or cash made by the buyer.
We offer assistance in dealing with all forms of international letter of credits. At this point, you must have some idea of the types of letter of credit in international trade as each form of a letter of credit serves a specific purpose.
Commercial Letter Of Credit For Global Trade Businesses
The commercial letter of credit is prominently used in global trade, while the standby letter of credit acts more like an insurance instrument/ payment guarantee letter rather than a means for secure payment. It comes into force when the beneficiary proves that the buyer has not paid the promised amount.
Revocable letter of credit is a legal tool for the issuer/importer to amend or cancel the exchange without having to notify the beneficiary. Hence, this form of bank letter of credit (LC) in international trade is quite rarely used. On the other hand, irrevocable is the most popular form of International letter of credit as any amendment or cancellation must pass through the consent of both parties.
The revolving form of letter of credit in international trade is used for making a series of payments. We advise clients to opt for such LC if they have a continual business with the concerned party.
The advantages of Letters of Credit
- First and foremost, the buyer does not have to deal with pre-payment requirements.
- The buyer creates an image of financial strength removing the air around payment capabilities.
- Ease in dealing with companies based abroad, devoid of any apprehension, especially regarding delivery delays due to payment uncertainties.
- Payment is not initiated by the bank until the package is received on time and meets the terms mentioned in the agreement. In case of any discrepancy, the payment is withheld.
- With the issuance of the global payment instrument, Bank Letter of Credit, the buyer or the importer can work on a deferred payment mechanism, thanks to the creditworthiness portrayed by the bank on behalf of the importer with the issue of LC.
- The biggest advantage that comes to the fore with the issue of payment guarantee letter (LC) for exporters is the security of payments. In fact, with letters of credit, the trade risk is evenly distributed between both the parties.
- If the terms of the contract are complied with, the exporter will get the payment regardless of the false quality complaints of the goods.
- International Letter of Credit helps to minimize the risk of incurring losses due to production cost, in case of cancellation or change in the order midway through the production process.