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.
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.
A buyer will request a note from a local bank so deem a seller as a beneficiary. The buyer's issuing bank will send the copy of the credit letter to the supplier or beneficiary's advising bank. The advising bank then needs to check the authenticity of the note and send any required documents back to the issuing bank. This would include delivery confirmations that state the goods were received by the buyer within the decided time frame, and also any documents that prove that the terms of the deal were met.
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.
The last type of note is revocable. Normally, credit letters are deemed final and irrevocable. However, if this letter was agreed to before the transaction, the issuing bank can cancel or change the entire deal after the process 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.
A buyer will request a note from a local bank so deem a seller as a beneficiary. The buyer's issuing bank will send the copy of the credit letter to the supplier or beneficiary's advising bank. The advising bank then needs to check the authenticity of the note and send any required documents back to the issuing bank. This would include delivery confirmations that state the goods were received by the buyer within the decided time frame, and also any documents that prove that the terms of the deal were met.
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.
The last type of note is revocable. Normally, credit letters are deemed final and irrevocable. However, if this letter was agreed to before the transaction, the issuing bank can cancel or change the entire deal after the process 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.
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