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International trade often involves amounts of risk and uncertainty due to possibly issues like distance, political instability, differing laws, etc. If the parties involved use a letter of credit, also known as an L/C, they can avoid these risks. L/Cs are usually written with fixed amounts and criteria, so they are often irreversible.
Banks used these letters to represent two parties of a trade or deal and negotiate the terms of the transaction. This guarantees that all goods are supplied for and paid for on time. Once the required shipping documents are provided and the payments are made, the banks can deem the transaction as finished. There are a variety of letters that depend on the negotiation made beforehand. They can be non-performing or standby, sight, confirmed, and even revocable.
The buyer of the two parties will usually request a note through the local bank, which is considered the issuing bank. The issuing bank will note the seller or supplier of the goods as the beneficiary, and will send the L/C to the beneficiary's advising bank. The advising bank is then tasked to authenticate the letter and provide all the necessary documents the beneficiary provides to it to the issuing bank. These are all documents and proof of terms fulfilled, including shipping confirmations of the goods.
Once the beneficiary has fulfilled its side of the terms and conditions, the issuing bank of the buyer will transfer the pre-determined funds to the advising bank. Once the advising bank receives said funds, it will credit the amount into the account of the beneficiary. One thing to keep in mind is that these letters can be sold or transferred to others because they are negotiable. Therefore, whoever is listed on the letter will receive the funds. Also, if the buyer's issuing bank fails to provide the funds, the advising bank also is not required to credit its beneficiary.
Sight credit letters are payable and fulfilled as soon as the advising bank sends the necessary documents to the issuing bank. Non-performing, or standby letters act as security for the beneficiary. If the buyer refuses to pay the funds by the due date even when the required documents are submitted, this letter protects the beneficiary's interests. It is only cancelled when all sums are paid.
Confirmed credit letters call for payment responsibilities for both the issuing and advising banks. While normally the advising financial institution doesn't have any responsibility to transfer funds to the beneficiary if the issuing bank does not pay it, with this letter it does. As long as the terms were met, the beneficiary is going to be paid no matter what.
There can also be a revocable letter. In usual cases, credit letters can't be modified. However, with this last note, the deal can be cancelled or changed by the issuing bank even after the transaction has started.
The beneficiary has to pay fees with these letters. They are payment, advising, discrepancy, reimbursement, or communication fees. The buyer only has one fee to open the letter initially. However, the amount of this fee can vary based on the country, sum of funds, and type of the letter.
Banks used these letters to represent two parties of a trade or deal and negotiate the terms of the transaction. This guarantees that all goods are supplied for and paid for on time. Once the required shipping documents are provided and the payments are made, the banks can deem the transaction as finished. There are a variety of letters that depend on the negotiation made beforehand. They can be non-performing or standby, sight, confirmed, and even revocable.
The buyer of the two parties will usually request a note through the local bank, which is considered the issuing bank. The issuing bank will note the seller or supplier of the goods as the beneficiary, and will send the L/C to the beneficiary's advising bank. The advising bank is then tasked to authenticate the letter and provide all the necessary documents the beneficiary provides to it to the issuing bank. These are all documents and proof of terms fulfilled, including shipping confirmations of the goods.
Once the beneficiary has fulfilled its side of the terms and conditions, the issuing bank of the buyer will transfer the pre-determined funds to the advising bank. Once the advising bank receives said funds, it will credit the amount into the account of the beneficiary. One thing to keep in mind is that these letters can be sold or transferred to others because they are negotiable. Therefore, whoever is listed on the letter will receive the funds. Also, if the buyer's issuing bank fails to provide the funds, the advising bank also is not required to credit its beneficiary.
Sight credit letters are payable and fulfilled as soon as the advising bank sends the necessary documents to the issuing bank. Non-performing, or standby letters act as security for the beneficiary. If the buyer refuses to pay the funds by the due date even when the required documents are submitted, this letter protects the beneficiary's interests. It is only cancelled when all sums are paid.
Confirmed credit letters call for payment responsibilities for both the issuing and advising banks. While normally the advising financial institution doesn't have any responsibility to transfer funds to the beneficiary if the issuing bank does not pay it, with this letter it does. As long as the terms were met, the beneficiary is going to be paid no matter what.
There can also be a revocable letter. In usual cases, credit letters can't be modified. However, with this last note, the deal can be cancelled or changed by the issuing bank even after the transaction has started.
The beneficiary has to pay fees with these letters. They are payment, advising, discrepancy, reimbursement, or communication fees. The buyer only has one fee to open the letter initially. However, the amount of this fee can vary based on the country, sum of funds, and type of the letter.
About the Author:
When looking for a letter of credit from a financial institution, you can trust BW Trade Finance company to take care of such matters. To know more, visit the website at http://www.bwtradefinance.com.
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