Tuesday, August 12, 2014

Smooth Transaction Using A Letter Of Credit

By Tanisha Berg


International trade always includes some uncertainty and risk due to several factors like distance between parties, political instability, country laws, etc. These possibly issues can be avoided when the two parties use a letter of credit, or L/C. An L/C can allow for a smooth deal because they are usually fixed.

When two parties want to make a deal, their banks use these letters to represent their interests and the terms of the negotiations. This way, the guarantees presented in the deal can be fulfilled correctly. Banks will use the letters to make sure all shipping documents are provided for payment to be made. There are also many types of credit letters, which depends on the deal itself. Parties can agree to sight, non-performing, standby, confirmed, and even revocable letters.

The buyer of the two parties will usually request a note through the local bank, which is considered the issuing bank. The issuing bank will note the seller or supplier of the goods as the beneficiary, and will send the L/C to the beneficiary's advising bank. The advising bank is then tasked to authenticate the letter and provide all the necessary documents the beneficiary provides to it to the issuing bank. These are all documents and proof of terms fulfilled, including shipping confirmations of the goods.

Once the beneficiary has fulfilled its side of the terms and conditions, the issuing bank of the buyer will transfer the pre-determined funds to the advising bank. Once the advising bank receives said funds, it will credit the amount into the account of the beneficiary. One thing to keep in mind is that these letters can be sold or transferred to others because they are negotiable. Therefore, whoever is listed on the letter will receive the funds. Also, if the buyer's issuing bank fails to provide the funds, the advising bank also is not required to credit its beneficiary.

Sight credit letters are payable and fulfilled as soon as the advising bank sends the necessary documents to the issuing bank. Non-performing, or standby letters act as security for the beneficiary. If the buyer refuses to pay the funds by the due date even when the required documents are submitted, this letter protects the beneficiary's interests. It is only cancelled when all sums are paid.

Confirmed credit letters call for payment responsibilities for both the issuing and advising banks. While normally the advising financial institution doesn't have any responsibility to transfer funds to the beneficiary if the issuing bank does not pay it, with this letter it does. As long as the terms were met, the beneficiary is going to be paid no matter what.

The revocable letter is the last of the types. Usually, credit note are unchangeable. However, if there is a revocable note in place, the issuing bank can modify or even cancel the transaction or deal after it has been issued.

There are fees the beneficiary must pay. The fees include general payment, advising, reimbursement, communication, and discrepancy. The buyer also is required to pay a fee, but only to open the initial letter. The amount of this fee varies based on the sum of the payments, type of note, and country.




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