Letter of credit

Letter of Credit

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What is a Letter of Credit?

A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Since the nature of international trade includes factors such as distance, different laws in each country and the lack of personal contact during international trade, letters of credit make a reliable payment mechanism. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions

Elements of Letter of Credit:

  • Applicant: The buyer in the business transaction.
  • Beneficiary: The seller of the goods and services and the ultimate recipient of payment in the business transaction. The beneficiary needs to provide all the required documents for the letter of credit to be processed.
  • Issuing Bank: The issuing bank provides an assurance to the beneficiary that the payment will be paid duly if all the documents presented comply with the stipulations stated in the letter of credit. The issuing bank also needs to examine the documents submitted by the beneficiary. It is absolutely liable to pay once all the terms and conditions in the LC are complete.
  • Advising Bank: The advising bank advises the beneficiary and helps him to use the letter of credit. It pays the beneficiary once the issuing bank makes the payment. It also has the responsibility to send the required documents to the issuing bank. The advising bank has no obligation to pay if the issuing bank is unable to pay the beneficiary.
  • Confirming Bank: The confirming bank confirms the letter of credit and assumes the same obligation as the issuing bank. The confirming bank is typically the advising bank. The conforming bank does a strict evaluation of the country and the issuing bank before confirming the LC.

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Types Of Letter of Credit:

  • Import/export
  • Revocable/ Irrevocable
  • Confirmed/Unconfirmed
  • Restricted/ Unrestricted
  • Deferred / Usance
  • At Sight
  • Red Clause
  • Back to Back
  • Standby Letter of Credit

Letter of credit advantages for the seller:

  • The seller has the obligation of buyer’s bank’s to pay for the shipped goods;
  • Reducing the production risk, if the buyer cancels or changes his order
  • The opportunity to get financing in the period between the shipment of the goods and receipt of payment (especially, in case of deferred payment).
  • The seller is able to calculate the payment date for the goods.
  • The buyer will not be able to refuse to pay due to a complaint about the goods

Letter of credit advantages for the buyer:

  • The bank will pay the seller for the goods, on condition that the latter presents to the bank the determined documents in line with the terms of the letter of credit;
  • The buyer can control the time period for shipping of the goods;
  • By a letter of credit, the buyer demonstrates his solvency;
  • In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to the buyer.
  • Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

FAQ

A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase

On behalf of a buyer, the issuing bank promises payment to a seller or beneficiary

An advising bank may act on behalf of the seller. The advising bank will receive payment, normally when they’ve been presented of specified documents representing the supply of goods.

  • Safe – Letters of Credit are usually legally binding and so all parties need to agree to cancel them;
  • Clarity – The goods defined in an LC are specific and well defined so the details of a transaction are generally very transparent;
  • Risk reduction – Exporter or payment to the seller is guaranteed providing the terms of the LC are met;
  • Allows Safe Trading – Letters of Credit are a focus of international trade, and allow companies to trade safely in unfamiliar markets with unfamiliar suppliers;
  • Efficiency – Letters of Credit can be raised electronically using an online trade banking service.

To receive payment, the beneficiary must present documentation of completion of their part in the transaction to the issuing bank and must present documents, such as:

  • Invoices;
  • Bills of Exchange;
  • Government documents

Well, it depends on your lender but generally it takes around 7 to 10 days. Moreover, it is recommended to apply online as it takes less time.

Yes, you need to have an activated credit card account then only the balance transfer can happen.

It is advisable to switch the loan early if you want to save more because later on you would have already paid out an ample amount of interest.

Yes, borrowing more money at the time of transferring your existing loan is called Top-up. You can apply for top-up along with the balance transfer, thus, you will get more loan and more time to repay it.

Yes, borrowing more money at the time of transferring your existing loan is called Top-up. You can apply for top-up along with the balance transfer, thus, you will get more loan and more time to repay it.