The letter of credit is mainly used for large transactions between the customers in one country and the other between the suppliers. Letters of credit are usually used to handle the success in international transactions. Due to the nature of international trade, the characteristics of various transactions, and factors, such as national law, distance, and difficulty, for all business partners to know personally, credit transactions have become an important tool for commercial transactions.
So it's amazing how many merchants and, surprisingly, banks in the United States are unfamiliar or in-convenient handling credit letters. Documentary letter of credit holds a primary purpose: This is a payment mechanism that reduces a chance that one or both sides will break into the import/export transaction. Using Documentary Letter of credit allows the seller to significantly reduce the risk of nonpayment for delivered goods in exchange for transferring the buyer's risk with the banks. Letters of credit are usually unalterable, which means that they cannot be canceled or revised without the confirmation bank, issuing bank or the consent of the beneficiary.
Advantages of letter of credit:- The main advantage of using a letter of credit is that it can provide protection for both the seller and the buyer.
Benefits for sellers: - By asking for a suitable letter, a vendor is assured that they will get their money on full and timely. One letter of credit for exporters is one of the safest methods of payment, as long as they meet all the terms and conditions are there. The risk of non-payment is transferred from the seller to the bank (or bank).
Benefits for buyers: - When a buyer uses a letter of credit, they are guaranteed that the seller will respect their favor of this deal and provide documentary proof of this.
We sometimes hear from companies who refuse to accept letters coming from abroad. Sometimes this happens because some did not run well in past transactions; Sometimes it is due to the fear of the unknown, and the locals are suspicious about what these foreign people are trying to do. It is true that Documentary letter of credit simple wire transfer is a bit more complicated than it is also true that a business is paid well for the time being understood in these things If it can expand its markets dramatically and it ensures that it is paid while doing overseas sales. If you are an exporter, then you should be aware that you will receive payment only in strict terms of a credit card. You will need to provide documentary evidence that you have contracted to supply. The seller can ask the buyer to provide a letter to credit for the payment of goods. The use of a letter of credit can sometimes cause delays and other administrative problems. To receive the payment, the shipper or exporter should present some documents.
Types of letters of credit:-
The business letter of credit is a direct payment method in which the issuing bank pays the beneficiary. On the contrary, an additional letter of credit is a secondary payment method in which the bank only pays the beneficiary when the holder cannot.
A revolving letter of credit attracts the customer to any number within a certain time period during a specific time period. The traveler’s credit of letter guarantees that the issuing bank will respect the drafts made on some foreign banks.
A certain letter of credit is usually used when the issuing bank of the credit card may have a suspected credentials and the seller wishes to obtain a second guarantee to guarantee payment. The second bank is a confirmation bank, usually the seller bank. Confirmation bank makes sure payment under a letter of credit if the holder bank issuing letter of credit.
It should be noted that the Documentary letter of credit transaction includes legal risk, regulatory and universal risk, and fraud risk, some risks involved. The risk for the applicant includes late or initial shipment, inferior quality, non-distribution of goods and more. In transit or short-shipment, goods may be damaged. It is important that the vendors review the requirements and present all documents on time.