Role of letters of Credit in trading

Role of letters of Credit in trading

A Letter of credit (L/C) has often been a key element in international trade. It is an important payment scheme that eliminates risks between sellers and buyers. It can be revocable or cancelled without consent up to the time the documents are submitted or irrevocable unless there is consent of all parties including the seller.
The written instrument is issued and checked for compliance by the bank for the buyer to document promised payment to the seller. The seller presents all documents called for in the letter while meeting all its terms and conditions. Once both parties have agreed, amendments are incorporated into it.
L/C is clearly a safe document that helps structure the buyer’s payment plan. There is also surety that payment will only be made after all the documents are presented.
Sellers are also guaranteed of reduced risk during trade especially when the buyer requests modification in the middle of a transaction.
L/Cs are distinguished by their different types of use: transferable for international trade, standby which is akin to a guarantee, revolving or contract for delivery and payment by installments, and future or credit for payment at future dates after negotiation, among others.
Reimbursements and courier charges are usually borne by the buyer. The cornerstone of L/Cs is that banks deal with documents only not goods.

Letter Of Credit Tips

• One letter of credit can cover many transactions
• It gives security to both the seller and the buyer
• See additional costs involved in a letter of credit