What about  Letters of Credit.

Importers and exporters normally require intermediaries such as banks or alternative financiers to guarantee payment and also the delivery of goods. Cash advances or trade credits on open accounts are usually used after the buyer and seller develop a trusted relationship. Therefore trade finance structures are used to support these relationships.

Letter of Credit: Some Guide.

Relationships between buyers and sellers are based largely on trust. Regardless of whether you are a buyer, seller, or end user of a product or service, being certain about the intentions of the other parties, and having security that they will honour their part of the deal is critical when trading overseas. It’s often easier to have a relationship with your supplier if you’re trading domestically (within the same region), but what if your supplier is less well known, perhaps based overseas? Although around 80% of global trade occurs on open account terms (buy now, pay later), suppliers now often ask for full payment up front. For businesses, access to credit lines which allow not only provide some form of guarantee and peace of mind that your goods will be protected, but also the offer of flexible payment terms, can be achieved through a Letter of Credit.

A Letter of Credit (or LC) is a commonly used trade finance instrument used to ensure that the payment of goods and services will be fulfilled between a buyer and a seller. The rules of a Letter of Credit are issued and defined by the International Chamber of Commerce through their Uniform Customs & Practice for Documentary Credits (UCP 600), used by producers and traders worldwide. Both parties use an intermediary, namely a bank or financier, to issue a Letter of Credit and legally guarantee that the goods or services received will be paid for.

How do You Use a Letter of Credit?

Letters of Credit are issued and formatted under the guidelines of the Uniform Customs & Practice for Documentary Credits, or the UCP600, that is issued by the International Chamber of Commerce (ICC). Using one is fairly straightforward, both for businesses selling and those buying goods and services.

One of the parties, usually the importer, will contact a bank or a financila service provider to serve as an intermediary and to guarantee to the seller that the goods will be paid for according to the agreement. All parties involved need to agree to the terms and sign the contract. This lowers the risk of doing business significantly, as Letters of Credit are legally binding documents that are acknowledged by 175 countries worldwide.

Check the Documents Carefully:

Although the guidelines and the form of any Letter of Credit are largely the same, the content is not. It is crucial that both the buyer and the seller inspect the documents carefully and check for errors and mistakes that may end up in delays, further costs, or deferred payment. Even a minor oversight can be quite costly in this regard, and it is advisable to use several sets of eyes to check the documents.

Letter of Credit terms include:

Advising bank – accepts and then notifies the beneficiary of the Letters of Credit.

Confirming bank – financial institution that agrees to honour and pays the Letters of Credit  to the beneficiary and receives payment from the advising bank.

Irrevocable – A non-amendable Letters of Credit, unless agreed by all parties.

Issuing bank / issuer – the party that issues the Letters of Credit. 

Presentation – delivery of the Letters of Credit  documentation and any other required documents that are required by the beneficiary should payment be made / the LC honoured.

Revocable – a type of Letters of Credit  that can be withdrawn, amended or cancelled y the issuing party at any time.

Standby – the most common LC type whereby agreement to pay is made under certain conditions.

Who should use a Letter of Credit?

Letters of Credit are useful to any business that trades in large volumes, both domestically, and cross-border. They are important to ensure the cash flow of a company and lowers the risk of default due to non-payment from the end customer.

Additionally, a Letters of Credit can benefit companies that structure their business around e-Commerce or services.

Jason Gavin

Email: jasongavin44@gmail.com

Telephone/WhatsApp: + 44 7452 390049

Twitter: @JasonGa58390383


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