There's always some level of uncertainty and risk involved in international trade due to distance, possibly political instability, differing laws, etc. These risks can be avoided by implementing a letter of credit, or L/C. These letters are usually irrevocable and will allow two parties to deal with certainty.
When two parties want to make a deal, their banks use these letters to represent their interests and the terms of the negotiations. This way, the guarantees presented in the deal can be fulfilled correctly. Banks will use the letters to make sure all shipping documents are provided for payment to be made. There are also many types of credit letters, which depends on the deal itself. Parties can agree to sight, non-performing, standby, confirmed, and even revocable letters.
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.
When the issuing bank confirms that the supplier and advising bank has fulfilled their sides of the letter conditions, it will send the amount of money that was pre-determined to the advising bank. Once the money is received, it is transferred into the bank account of the beneficiary. Keep in mind that you can transfer or sell the title of the note to another, so whoever is listed on the note will receive the money. However, if the issuing bank does not send the funds to the advising bank, the latter has no obligation to transfer any money to the beneficiary.
Sight letter types are payable when the documents are all submitted to the issuing bank. Non-performing or standby letters pose as a fallback for the supplier or beneficiary if for any reason the buyer refuses to pay the specified amount by the due date, even when the goods were delivered. This is a good way to protect the interests of the beneficiary, and is fulfilled or cancelled once the 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.
When two parties want to make a deal, their banks use these letters to represent their interests and the terms of the negotiations. This way, the guarantees presented in the deal can be fulfilled correctly. Banks will use the letters to make sure all shipping documents are provided for payment to be made. There are also many types of credit letters, which depends on the deal itself. Parties can agree to sight, non-performing, standby, confirmed, and even revocable letters.
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.
When the issuing bank confirms that the supplier and advising bank has fulfilled their sides of the letter conditions, it will send the amount of money that was pre-determined to the advising bank. Once the money is received, it is transferred into the bank account of the beneficiary. Keep in mind that you can transfer or sell the title of the note to another, so whoever is listed on the note will receive the money. However, if the issuing bank does not send the funds to the advising bank, the latter has no obligation to transfer any money to the beneficiary.
Sight letter types are payable when the documents are all submitted to the issuing bank. Non-performing or standby letters pose as a fallback for the supplier or beneficiary if for any reason the buyer refuses to pay the specified amount by the due date, even when the goods were delivered. This is a good way to protect the interests of the beneficiary, and is fulfilled or cancelled once the 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.