The Need For Letter Of Credit Transactions
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.
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.
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 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.
With confirmed credit letters, the beneficiary will be paid either by the issuing or advising banks. Normally, the advising bank doesn't have any obligations to pay the beneficiary if the issuing bank doesn't transfer any funds. However with this note, the beneficiary will be paid by the advising bank as long as the terms of the letter were met.
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 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.
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.
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 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.
With confirmed credit letters, the beneficiary will be paid either by the issuing or advising banks. Normally, the advising bank doesn't have any obligations to pay the beneficiary if the issuing bank doesn't transfer any funds. However with this note, the beneficiary will be paid by the advising bank as long as the terms of the letter were met.
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 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.
posted by Vittoria @ August 11, 2014
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