A letter of credit (LC) serves as a reliable financial instrument in international trade by offering a guarantee of payment from the buyer's bank to the seller's bank, contingent upon the presentation of specified documents.
2. An LC has charges and other costs that the buyer hasn't to pay.
1. The exporter has to follow properly with the terms, conditions and delivery terms or the payment will not be effected by the bank.
Advantages
4. The importer cannot cancel the order or change the delivery time.
3. In an LC, all required documents have been mentioned well in advance of shipment wich saves time and misunderstandings.
2. The buyer cannot deny the payment by raising dispute on quality of goods.
1. The buyer's bank guarantees the payment through the seller's bank on presentation of required documents.
Disadvantages
4. The LC can be affected by currency fluctuations.
3. Compared to other means of payment ., the expenses for opening, negotiating and other procedures of LC are high.
2. One opened an LC, the importer cannot change the purchase order or cancell it.
1. The importer cannot personally verify at the port of arrival, if the goods has been shipped correctly and are in the perfect conditions.
Advantages:
3. The bank pays only after verifying that all terms and conditions are correct, which is a measure of protection towards the importer.
2. The importer can plan the payment schedule properly by anticipating the requirements under LC.
1. The seller will sent the goods on time, it significates, that there is a high degree of assurance that goods and services will be delivered.
Letter of credit
4. The most important documents for a LC are: 1. Insurance documents: insurance policy or certificate. 2. Commercial documents: commercial invoice, packing list and weight list. 3. Shipping documents: bill of lading 4. Financial documents: bill of exchange. 5. Official documents: license, certificate of origin, inspection certificate, embassy legalization and/ or phytosanitary certificate.
5. Use a LC as a mean of payment is expensive, more that other options.
1. A letter of credit is a written commitment to pay from the buyer's bank to the seller's bank, as long as the presented documents comply with all of the LC terms and conditions the documents within a fixed time frame. An LC offers protection to both parties, buyer and seller, and, for this reason, is often used as a mean of payment in international trade.
3. 2 Advantages and disadvantages of a L/C for the seller / exporter
3. 1 Advantages and disadvantages of a L/C for the buyer / importer
2. The beneficiary in a letter of credit is the seller.
