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American Import Export Management They Collect The Cash

Last issue I talked about the four basic methods of payment when engaging in international trade; this time I'd like to focus on the most used method.

Essentially, the Letter of Credit (L/C) is a letter of instruction issued to a seller by a bank at the request of the buyer. It provides the issuing bank's promise to pay a specified amount of money upon receipt by the bank of certain documents within a specified time. The documents ensure that conditions stated in the L/C, such as terms of sale, shipping date, insurance coverage, etc., have been met.

All L/C's are issued in a "revocable" or "irrevocable" form and are either "confirmed" or "unconfirmed." If the L/C is irrevocable, the buyer's bank must pay even in the buyer defaults. A revocable L/C is not usually recommended as it may be changed or revoked without the seller's permission.

If a L/C is confirmed by a U.S. bank, then the seller is still paid by the buyer's bank even if the buyer's bank defaults. An unconfirmed L/C isn't recommended if there's any reason to believe that the buyer's bank will default (i.e., bank doesn't have a good record or the country is politically or economically unstable).


SELLER'S ADVANTAGES
  • The L/C allows him to rely on a bank's credit worthiness, rather than that of the buyer.

  • The risk of payment potentially being delayed or otherwise jeopardized by political or foreign exchange problems in the buyer's country can be reduced.

  • He may be able to obtain financing for the purchase or production of goods to be shipped under the L/C.

The seller's risk? Basically, the document must conform exactly to the terms and conditions of the L/C in order to ensure payment.


BUYER'S ADVANTAGES
  • He is assured that his bank will refuse payment unless the seller's documents conform exactly to the L/C's terms and conditions.

  • If the seller is willing to extend payment terms to the buyer, a L/C payable at a future date may be arranged.

The buyer's risk? The L/C relates only to documents, not goods; i.e., the merchandise may be different than it was presented in the documentation.

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