Letters of credit are reliable guarantees for both parties to the transaction

What is a letter of credit? This is the issued obligation of the bank on behalf of the buyer, aimed at paying for all documents provided by the seller, in the event of compliance with all conditions of the contract. Irrevocable letter of credit - non-cash form of payment, which is a guarantee of payment. All documents of the seller are checked in accordance with international standards. Letters of credit are an agreement between the seller and the buyer, designed to ensure a balance between them in the event that the enterprise performs a foreign trade operation for the first time or develops a new sales market.

Features

The main difference between letters of credit and any other settlement methods is that only documents are used in circulation, not the goods that these papers provide. Banks only consider the documents mentioned in the letter of credit, they do not pay attention to other contracts (contracts and any other agreements between the buyer and the seller). This is not only an obligation, but also the conditions determined by the buyer and provided in writing to the bank together with the application for the opening of the letter of credit.

A letter of credit is what? Arrangements

The documentation should include:

• Number and date;
• Amount;
• Type of letter of credit;
• Details of the beneficiary, the payer, the issuing bank, as well as the executing organization;
• Mode of execution;
• validity;
• Term for the provision of documents;
• Purpose of payment ;
• Need for confirmation;
• List of documents and requirements for them;
• Procedure for payment of commission of banks.

The letter of credit can solve the problem when the seller refuses to send the goods without guarantee of payment, and the buyer does not want to give money until he is sure that everything is delivered in accordance with the terms of the contract.

Kinds

We have already found out that letters of credit are liabilities of the bank aimed at paying for all documents provided by the seller, and also examined what should be indicated in them. Now consider the types of letters of credit :

• Revision . Conditions can be changed, it can be easily canceled without notifying the seller.
• Irrevocable . This can not be annulled, and any of its conditions are changed only with the consent of all parties.
• Translation . The seller, not the supplier of the whole lot of goods, transfers its own rights to receive funds in whole or in part to third parties and accompanies the executing bank with the necessary instructions.
• Standby letters of credit are a guarantee of securing payment in the event of the buyer failing to fulfill its own obligations specified in the contract.
• Revolver . Used for regular supply of products. The amount of the letter of credit is replenished automatically as payments are made within the established limit and the term of its validity.

Advantages and disadvantages

Letters of credit are guaranteed receipt of absolutely the entire amount from the buyer, careful monitoring of compliance with all the terms of the contract, a full refund of money upon cancellation of the transaction, as well as legal responsibility of banks for the legality of transactions where the letter of credit is applied. By cons are the difficulties with documentation and the high cost of such a form of calculation for a foreign trade transaction.