| # Letter of Credit The Letter of Credit is a financing agreement most commonly used for trade arrangements when goods cross international borders. Letter of Credit (L/C) is issued by a bank to another bank (in a different country) as a guarantee for payments made to a specific person under specific conditions. The bank issues this instrument at the request of its customer (the importer or buyer), and promise to pay the Seller (the exporter or beneficiary) for goods or services provided, only if the exporter presents all the required documents, as stipulated in the L/C, and all other terms and conditions specified in the Letter of Credit such as the delivery of a quality certificate and/or a certificate of insurance, are met. The conditions are generally considered to be met if the issuing bank is presented with an invoice and proof of delivery by the exporter's bank, as evidence that the goods are shipped to the importer. If, for any reason, the buyer is unable to pay for the goods exported by the seller, the L/C obligates the buyer's bank to pay the seller on the buyer's behalf. For example: the buyer has a L/C covering a shipment. Effectively, the bank has promised that the seller receives the payment for that shipment. For the buyer (importer), L/Cs assure that the exporter is paid only if all the terms and conditions are met. Besides, the importer can also negotiate favorable trade terms with the exporter. An L/C does not cover the risk of receiving inferior quality goods from the exporter. In such situation, additional protection can be provided, by requesting additional documentation along with L/C, such as a certificate of inspection. For the seller (exporter) the risk of payment relies upon the creditworthiness of the issuing bank (and not the importer) as well as the political risk of the country in which seller resides. The exporter agrees, in advance, to all requirements for payment specified in the L/C and if these conditions are not met, the exporter is not obligated to ship against L/C. Note The exporter has to prepare and present all the documents in strict compliance with the requirements stipulated in the L/C. |