One of the reasons why most importers and exporters use letters of credit is because it allows them to reduce the inconveniences and unplanned factors that can hinder foreign transactions. By using a letter of credit an exporter knows that he or she will receive payment for the merchandise if it is delivered according to what the importer request in the letter of credit.

The actual document is needed for the exporter to be able to request the payment of the merchandise. It is the bank who will review the letter of credit along with other documents in order to proceed to payment. The bank will only be responsible for what is stated in the document and nothing more. That is why it is called documentary credit.

A letter of credit provides the user with the expertise of the people who are behind it. The exporter or the importer do not have the create everything from scratch. There are experts on this topic that provide their advice so that the process will be faster. Part of the services that you get from the use of letters of credit is continuous updates on the status of your commercial credits, etc.

What do you need to get a letter of credit?

In order for the importer to get a letter of credit he or she first needs to open a contract. The importer will also request its bank for a line of credit in order to pay for the merchandise. The bank will also provide protection in case of fluctuations in the currencies. The importer will then sign purchase order, pro forma invoices and sales contracts to proceed to the issuing of the letter.

The parties involved in a letter of credit

First of all, the people who offer it. The letter of credit is offered by banking institutions. The issuing bank opens or issues the letter of credit.

Second, the users. For this type of document, the users are buyers or importers (or applicant originator of the letter of credit). Similarly, a user can also be the seller (beneficiary of the letter of credit).

The payer or the critical buyer is the Importer. He or she requests the opening of the letter of credit. The originator of the letter of credit is the person who goes to order the bank to open a letter of credit on his or her account and give it to a beneficiary. The beneficiary can turn the letter of credit upon presentation of certain documents; usually documents evidencing the shipment of certain merchandise and get payment.