Letter of Credit

 

Letter of credit are used where the Exporter/Producer are not sure of payments and the Export customer is not sure of the delivery of the goods, it protects the interests of both the parties the Producer as well as the Customer. It is also known as documentary credit, where the importer banks promises to pay the sum to the beneficiary up to a stated sum of money within the prescribed time limit, if the Importer fails to pay the desired amount of sum. It sis  from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions. There are several types of letters of credit available.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

Types of Letter of Credit

There are of two types:

• Revocable Letter of Credit: A Revocable credit that can be cancelled at any time without prior information to the exporter/producer.
• Irrevocable Letter of Credit: A Irrevocable credit cannot be altered or cannot be canceled without prior information to the Exporter or Consumer

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