Import Export Management They Collect The Cash
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
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.
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.
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).
L/C allows him to rely on a bank's credit worthiness, rather
than that of the buyer.
risk of payment potentially being delayed or otherwise jeopardized
by political or foreign exchange problems in the buyer's country
can be reduced.
may be able to obtain financing for the purchase or production
of goods to be shipped under the L/C.
seller's risk? Basically, the document must conform exactly to the
terms and conditions of the L/C in order to ensure payment.
is assured that his bank will refuse payment unless the seller's
documents conform exactly to the L/C's terms and conditions.
the seller is willing to extend payment terms to the buyer,
a L/C payable at a future date may be arranged.
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.