BENEFITS OF THE LETTER OF CREDIT

BENEFITS OF THE LETTER OF CREDIT


The letter of credit is the safest, most secure and most convenient settlement method for international transactions. There are a number of advantages both for the seller/exporter and the buyer/importer.

BENEFITS TO SELLERS


•Assures the security of payment from an international bank once the terms of the letter of credit are met.


•Seller can determine when payment will be satisfied and ship the goods accordingly.


•Bank bears the responsibility of oversight.


•Seller does not have to open an account and grant payment terms to buyer. Credit risk is nearly eliminated. The risk of exchange control created with payment delays is greatly reduced.


•Provides seller easier access to financing once the letter of credit has been issued.


•Once the bank confirms the letter of credit, political and economic risk and questions regarding the buyer's ability to pay are eliminated. The confirming bank is obliged to pay, even if the buyer goes bankrupt, provided the terms of the letter of credit are met.

BENEFITS TO BUYERS


•Facilitates financing--for example, creating banker's acceptances.


•Buyer can confirm that the merchandise is shipped on or before the required date.


•It is safer to deal with bank than to prepay.


•Buyer may get better terms and prices.


•No cash is tied up in the process. Buyer does not have to pay cash up front to a foreign seller before receiving the documents of title to the goods purchased. This is particularly helpful when the buyer is unfamiliar with local suppliers and laws.


•Protects the buyer since the bank only pays when the supplier complies with the specific terms and conditions and produces the documents required by the buyer.


•The buyer can build safeguards into the letter of credit, including inspection of the goods and quality control, and set production and delivery times.

[Adapted from the internet]