Abstract
This paper explores such questions as the definition of letter of credit, its type, the use of these types ate mentioned. The point of using letter of credit is studied and the work of this mean of payment is described. The advantages and disadvantages of the main types of letter of credit for sellers and buyers are considered.
Keywords: letter of credit, issuing bank, advising bank, seller, buyer, bill of lading, commercial invoice.
As a very common way of international payments that causes the risks of transactions to be divided between the buyer and seller Letter of credit is known. Letter of Credit (L / C) is a document issued by a bank, which refers to the willingness of the bank to pay to the seller or exporter a certain amount of money on behalf of the buyer (importer) if the seller performs certain conditions. The procedure of opening letters of credit is held in accordance with standards established by the regulations issued by the International Chamber of Commerce (ICC). The main stages of the implementation of the transaction with letters of credit are considered to be the following. First of all when the buyer and seller agree on the conditions of each transaction, the buyer goes to his bank to open a letters of credit in favor of the seller. The buyer should have a line of credit with his bank or provide it with cash in the amount of L / C. The buyer's bank prepares to issue the Letter of Credit that includes all of the buyer’s directions concerning the terms of the shipment of goods by the seller and the documentation provided by the seller. The buyer sends letter of credit to the correspondent bank (advising bank) in the seller’s country. The seller may require the advising bank to be a particular bank, or the buyer’s bank can choose any related bank in the seller’s country for this role. The seller's bank sends the letter of credit to the seller. The seller scrutinizes all the conditions imposed by the buyer in the L/C. If the seller can not fulfill one or more conditions, he immediately informs the buyer about it and askes to make changes to the letter of credit. After final settlement of all terms of the transaction the seller prepares the goods and arranges to send them to the appropriate port. The seller ships the goods and gets the bill of lading and other documents, which should be provided to the buyer under the terms of letters of credit. Sometimes some of these documents are necessary to be got before shipment. The seller sends the documents to the advising bank, reporting that all terms of the letter of credit are fulfilled. Some of the required documents usually include a bill of lading, commercial invoice, certificate of origin, certificate of inspection. The advising bank checks the documents. If they are right, they are sent to the issuing bank. If a commercial letter of credit is irrevocable and confirmed, the seller has a guaranteed payment from his bank. After receiving the documents the issuing bank, it informs the buyer about this and the buyer looks through these documents. If they are correct, the buyer confirms it with his signature, makes a payment to the bank and receives the documents that provide the holder of the documents with ownership title to the goods. The issuing bank makes a payment to the advising bank and it in its turn pays to the seller. Transfers of money from the buyer to his bank, from the buyer’s bank to the seller’s bank, and from the seller’s bank to the seller may be performed simultaneously with the exchange of documents, or in accordance with the pre-agreed procedure. There are two main types of letters of credit, which include Revocable Credit and Irrevocable Credit. All kinds of such letters of credit have their advantages and disadvantages from the point of view of the buyer and seller. You should also note that the greater the risk of guaranteed payment is taken by banks, the higher is the fee that they demand for their services. Revocable Credit can be converted or canceled without informing the seller. Therefore this kind of letter of credit is not acceptable to the seller. Irrevocable Credit can not be converted or canceled by the buyer. Changes in respect of the letter of credit must be approved by both parties of the transaction, the buyer and seller. This type of credit is most commonly used in international trade. Irrevocable letter of credit is of two kinds: Irrevocable Confirmed Credit and Irrevocable Credit Not Confirmed. The issuing bank, providing irrevocable credit not confirmed, is the only side that is responsible for the payment to the seller. In the case of an irrevocable confirmed credit the advising bank ensures that it will make the payment to the seller, in addition to the guarantees provided by the issuing bank. If the issuing bank doesn’t make the payment, the payment will be produced by the advising bank. This type of credit can be used for doing business in high-risk areas, the danger of war, social, political and financial instability exists.
References
Justin Pritchard. Letter of Credit - How Letters of Credit Work (n.d.). In Banking.about.com.
Retrieved from
http://banking.about.com/od/businessbanking/a/letterofcredit.htm
Letters of credit for importers and exporters (n.d.). In Gov.uk. Retrieved from
https://www.gov.uk/letters-of-credit-for-importers-and-exporters
