2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
What is a letter of credit? This is an obligation issued by the bank on behalf of the buyer, aimed at paying for all documents provided by the seller, in case of compliance with all the terms of the contract. An irrevocable letter of credit is a non-cash form of payment, which is a guarantee of payment. All documents of the seller are checked in accordance with international standards. Letters of credit are an agreement between the seller and the buyer, designed to ensure a balance between them in the event that an enterprise conducts a foreign trade operation for the first time or develops a new market.
Features
The main difference between letters of credit and any other payment methods is that only documents are used in circulation, and not the goods that these papers provide. Banks consider only the documents mentioned in the terms of the letter of credit, they do not pay attention to other agreements (contracts and any other agreements between the buyer and the seller). This is not only an obligation, but also conditions specified by the buyer and provided in writing to the bank along with the application for opening a letter of credit.
Letter of credit - what is it? Points of agreement
The documentation should containspecified:
- number and date;
- amount;
- type of letter of credit;
- details of the recipient, payer, issuing bank, and performing organization;
- performance method;
- validity period;
- deadline for submission of documents;
- payment purpose;
- need confirmation;
- list of documents and requirements for them;
- Bank fee payment procedure.
A letter of credit can solve the problem when the seller refuses to send the goods without a guarantee of payment, and the buyer does not want to give money until he is sure that everything has been delivered in accordance with the terms of the contract.
Views
We have already found out that letters of credit are bank obligations aimed at paying for all documents provided by the seller, and also sorted out what should be indicated in them. Now consider the types of letters of credit:
- Revocable. The terms are subject to change, it is easy to cancel without notifying the seller.
- Irrevocable. This cannot be annulled, and any of its conditions are changed solely with the consent of all parties.
- Translated. The seller, who is not the supplier of the entire batch of goods, transfers his own rights to receive funds in whole or in part to third parties and accompanies the executing bank with the necessary instructions.
- Standby letters of credit are a guarantee of payment security in the event that the buyer fails to fulfill its own obligations specified incontract.
- Revolver. Used for regular deliveries of products. The amount of the letter of credit is replenished automatically as payments are made within the established limit and its validity period.
Pros and cons
Letters of credit are a guaranteed receipt of absolutely the entire amount from the buyer, careful monitoring of compliance with all the terms of the contract, a full refund in case of cancellation of the transaction, as well as the legal responsibility of banks for the legality of transactions where a letter of credit is used. The disadvantages include difficulties with documentation and the high cost of this form of payment for a foreign trade transaction.
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