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Advantages of Letter of Credit


A Letter of Credit (L/C) is defined as an obligation for the issuing bank which will open the letter of credit through which they will pay an agreed amount to the seller on behalf of buyer when the documents mentioned within the letter of credit. The instrument is opened by the issuing bank on the instructions of the importer or buyer which are in compliance with the terms specified in the contract. Both the exporter and the importer are under the obligation to consider the terms upon which the letter of credit constitutes upon which is separate from the sale and purchase agreement or any other agreement upon which they are based. The obligations of the issuing bank are mentioned therein and the bank exclusively deals in documents and not in services or goods.

Advantages of Letter of Credit for Importers & Exporters

There is a common assumption that letters of credit are usually issues when the buyer and seller are not enjoying a good business relationship or they do not trust each other. However, this assumption is common among those businesses that are not operating internationally and they are not aware with the risks associated with dealing overseas. As a matter of fact, letter of credit serves as a very useful financial instrument for both the seller/exporter and buyer/importer. While this financial instrument is particularly suited for transactions involving high quantity of dollars, there are some advantages for both the parties which are mentioned as follows:

Advantages of Letter of Credit for Importers

  • Letter of Credit (L/C) allows the importer to reduce or avoid deposits or partial pre-payments.
  • The risk of non-performance of the exporter is reduced. If the goods are not shipped, the importer is not under the obligation to pay for the goods.
  • The payment will made to the exporter only upon the presentation of the documents under strict compliance in which the letter of credit will support the fact that the goods are shipped.
  • All the documents are received quickly, expediting the clearance of customs and its delivery.
  • Structuring and payment schedule is very easy.
  • The importer will have the opportunity to receive goods on time as the letter of credit specifies a shipment date.

Advantages of Letter of Credit for Exporters

  • When the specified documents are presented under strict conformance the exporter or buyer is guaranteed to receive payment provided the issuing bank does not fold it.
  • If the buyer or the exporter cancels the order the risk of production arises which is eliminated by issuing letters of credit.
  • The exporter finds it easy to secure production/order finance and pre-export financing.
  • The exporter cannot refuse payment because of receiving complaints related to the goods transacted. Any complaints should be settled outside the letter of credit.
  • Letters of credit have the ability to restructure the schedule of delivery which in accordance with the interest of the exporter.
  • Easy to secure all receivable financing if the letter of credit is not to be paid At Sight.
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Posted by: on Feb 11 2014

Tags: Letter Of Credit Letter Of Credit Benefits Basics Of Import Export Basics Of Trade International Trade

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