The Need For Letter Of Credit Transactions

By Tanisha Berg

There's always some level of uncertainty and risk involved in international trade due to distance, possibly political instability, differing laws, etc. These risks can be avoided by implementing a letter of credit, or L/C. These letters are usually irrevocable and will allow two parties to deal with certainty.

These credit letters are negotiation tactics made by banks on the behalf of buyers and suppliers. It guarantees that goods are paid for in full and on time. They are fulfilled when the beneficiary submits the necessary shipping documents and payments are made. There are many types of credit letters, and it depends on the needs and conditions of the two parties. These include sight, standby or non-performing, confirmed, or revocable.

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.

The issuing bank of the buyer will authenticate the documents that prove that the terms and conditions were met, and will transfer the agreed upon sum of money to the advising bank. Once the money is received by the advising bank, it is transferred to the beneficiary. Since credit letters are negotiable to begin with, it's possible to transfer the title to someone else. In this case, whoever is listed on the note will be the one who receives the money. For whatever reason the issuing bank does not send the money to the advising bank, the advising bank has no obligation to pay the beneficiary.

Sight credit letters are types that call for payment immediately after all necessary documents are sent to the issuing bank. Standby or non-performing letters protect the interests of the beneficiary, and provides security in case the buyer does not pay the pre-determined sum of money by the due date. Once the sum is paid by the buyer, this letter can be cancelled.

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 last type of note is revocable. Normally, credit letters are deemed final and irrevocable. However, if this letter was agreed to before the transaction, the issuing bank can cancel or change the entire deal after the process has started.

There are certain fees that the beneficiary has to pay such as communication, general payment, advising, discrepancy, and reimbursement. If the conditions are met, the advising and discrepancy fees are voided. The buyer also must pay to create the letter itself. Based on the country, sum, and type of letter; the amount of the fee varies.

About the Author:

When looking for a letter of credit from a financial institution, you can trust BW Trade Finance company to take care of such matters. To know more, visit the website at http://www.bwtradefinance.com.