How A Letter Of Credit Helps International Trade
In the case that a company decides to take international trade seriously, imports and exports will change the way it does business. The risks are always related to how successful it is in the markets it enters. The bright side is that the business may decide to stop exports or imports if business is not profitable.
Companies have different ways of protecting themselves legally against risks and also to increase their financing. The most common ways of doing is by using factoring, bank guarantees, and the popular letter of credit.
A letter of credit is one of many methods to provide protection to both parties involved in international transactions.
The letter of credit is often used in international transactions by buyers and sellers outside their borders. The use of this document is essential for imports and exports. The letter of credit is a legal guarantee, because it uses international trade practices to regulate and enable transactions. It is provides not only the legal structure but the formal structure in order for the imports and exports to come to an end to the benefit of both parties.
The Letter of Credit is the promise given by a bank (Issuing Bank), acting on instructions from its customer (payer) to pay certain sum of money to a person or company (Recipient), through one of its correspondents Bank (Notifier), provided that certain requirements are met, such a rule, are the delivery of documents within a stipulated date.
This type of credit document is beneficial for the party paying for the merchandise, because payments can only be done upon presentation of the letter of credit.
A letter of credit will provides the formality and legal structure sufficient for transactions to be done properly. It evidences that the merchandise arrive in the conditions expected.
This type of credit document creates a link between the exporter and the importer and works as a mechanism for payments that involves banks.
