LETTER OF CREDIT

A how to reduce the risk of non-payment is to request a letter of credit from your client. It is issued by the bank and guarantees that the payment will be madeIt therefore offers a high level of security. You will also have to come to an agreement with your bank, providing documents as proof that it has supplied the agreed goods. 

Also it is advisable to obtain an irrevocable letter of credit, that cannot be changed or cancelled unless all parties agree. A revocable letter of credit, However, can be changed or cancelled by the bank at any time. 

What is a letter of credit in foreign trade?

The letter of credit is an instrument whereby an issuing bank, following the instructions of a client or originator - buyer or importer - makes a payment to a third party or beneficiary - seller or exporter - against delivery of the required documentation, usually evidence of the shipment of certain goods (customs certificates, purchase invoice, insurance).

Its function is to guarantee distance sales within the same country and also for the purpose of exporting goods to other countries.

Who pays for the L/C?

Payment of the amount stipulated in the letter of credit The importer is responsible for international trade, upon receipt of the documents proving that the goods, which is exchanged according to the conditions agreed in the contract, has been shipped.

As the letter of credit is issued by a financial institution that guarantees that the buyer's payment to the seller will be made by the buyer, the L/C is issued by a financial institution that guarantees the buyer's payment to the seller. will be received on time and for the correct amount, in the event that the buyer is unable to make the payment, the bank itself will be obliged to cover the full or remaining amount of the purchase.

Even if a customer were to declare bankruptcy, the bank would still be obliged to pay, as long as the documents comply with the terms agreed in the documentary credit. Therefore, the bank would be obliged to pay, as long as the documents complied with the terms of the documentary credit, the main feature of the L/C is that it brings confidence and security to commercial transactions from anywhere in the world.

What is the opening of a letter of credit?

A letter of credit is triggered when a seller and a buyer agree on a set of conditions (delivery method, quality, quantity, payment method, value). However, in order to be able to use this instrument, it is necessary first to the buyer must apply to his bank for a letter of credit to be issued in his favour.

This is known as opening a letter of credit, at which point the bank assumes responsibility for paying the seller when the terms of the transaction are fulfilled. In turn, the issuing bank notifies the seller's bank that there is a documentary credit for which its customer is the beneficiary.

To issue a letter of credit, it is common for financial institutions to require collateral in the form of securities or cash as security.The amount of the service fee, which generally corresponds to a percentage of the amount reflected in the L/C, should be added to the amount of the service fee.

What types of L/Cs are there?

THERE ARE DIFFERENT TYPES OF CREDIT THAT CAN BE ISSUED BY A BANK DEPENDING ON THEIR REQUIREMENTS AND TERMS:

• Irrevocable: lost letters of credit are of this nature as the agreement between the parties cannot be modified without the prior consent of all the actors involved.
• Nominative: aqThose that expressly indicate which banks are authorised to issue, confirm and negotiate the L/C. Otherwise, it is said to be a negotiable L/C. Otherwise, it is said to be a negotiable letter of credit.
• Commercial: chen the transaction is a sale and purchase transaction at the local or international level - import or export.
• At sight, by acceptance or by deferred payment: dDepending on its availability, the documentary credit qualifies as a sight credit when payment is immediate upon presentation of the agreed documentation.

On the contrary, acceptance is when the paying bank accepts a bill of exchange drawn at a certain time, and deferred payment is when payment takes place within a certain period of time after the L/C has been drawn. (at a given maturity).

• Transferable: in this case, the exporter may transfer all or part of its rights to another party. In this way, it avoids using its own funds to buy the goods from its supplier. To do so, the transfer shall be indicated in the terms of the letter of credit.
• Stand by: Colloquially, one could say that this type of letter of credit corresponds to a plan B. It is a kind of bank guarantee used to cover financial obligations due to non-payment. Generally, this type of credit expires after 12 months.

The letter of credit, in any of its modalities, is a very common resource in international trade. 

Distances and the existence of cultural or language barriers can have a negative impact on trust. This is why this instrument is one of the best insurances for exchanges between actors from different countries, and the one that makes it possible, in many cases, for exchanges to continue.

A letter of credit is a document issued by a bank that guarantees payment to the seller of a good, as long as the seller complies with the conditions established in the sales contract. The letter of credit is a very useful tool in international trade as it offers security and confidence to both parties involved in the transaction.

The process of opening a letter of credit begins when the buyer requests his bank to issue a letter of credit in favour of the seller. The issuing bank assumes responsibility for paying the seller once the conditions set out in the contract are met.

It is important to note that there are different types of L/Cs, such as irrevocable, nominative, commercial, at sight, acceptance or deferred payment, transferable, standby, among others. The letter of credit is a a valuable tool to reduce the risk of non-payment in commercial transactions and to ensure trust between the parties involved in a transaction.

What are the requirements for a letter of credit?

For the opening of a letter of credit, the buyer is generally required to provide the bank with a number of documents and information necessary for the issuance of the documentary credit.

THESE REQUIREMENTS MAY VARY DEPENDING ON THE TYPE OF TRANSACTION AND THE AGREEMENT BETWEEN THE PARTIES, BUT SOME COMMON DOCUMENTS THAT ARE USUALLY REQUESTED ARE:

1. Contract of sale and purchase: A document that sets out the terms and conditions of the commercial transaction between the buyer and the seller.
2. Commercial invoice: a document issued by the seller detailing the goods sold, their value and the terms of payment.
3. Shipping documents: such as the bill of lading, the document proving ownership and transport of the goods, and other customs and transport documents.
4. Certificates of origin: documents certifying the country of origin of the goods.
5. Insurance: proof of insurance for the goods during transport.

In addition to these documents, the bank may also request additional information about the purchasing company, such as its financial capacity and creditworthiness, in order to assess the credit risk before issuing the L/C. It is important to note that requirements may vary according to jurisdiction and local banking regulations.