LETTER OF CREDIT The letter of credit helps to overcome a number of obstacles of international trade:
Lack of mutual business confidence between the parties of trade transaction, Numerous risks both for an importer (buyer) and exporter (seller), Lack of funds necessary to execute a transaction.
What is a letter of credit? Documentary letter of credit is a monetary obligation which the bank assumes based on the customer instruction, that is to say the bank is obliged to make or ensure payment to the seller of goods after the documents set out under the terms of LC have been submitted. Types of LC offered by ARARATBANK
Unconfirmed letter of credit: The LC issued by the bank is directly sent to the notifying bank to notify the beneficiary about the LC. The notifying bank does not assume any extra obligations. Confirmed letter of credit: The LC may be confirmed by another first-rate bank as requested by the beneficiary. Moreover, confirming of the letter of credit implies an independent and extra obligation of the confirming bank to pay the letter of credit after the prescribed documents have been submitted. Standby letter of credit: This is a special type of LC and essentially closer to the bank guarantee, the aim of which is to mitigate possible risks of nonperformance of obligations. The standby letter of credit is expedient to use as an additional security for the payments to be made in favor of the exporter.
ADVANTAGES LC advantages for the buyer (importer)
The seller (exporter) supplies goods before the buyer (importer) makes the payment. The payment is made after the seller (exporter) has supplied goods and presented the bills of lading, which mitigates the buyer’s (importer’s) risks. If the seller (exporter) violates any preset term of lading, it may result in nonpayment for the supplied goods. In case of the letter of credit the seller relies on the solvency of the bank and is confident that after meeting all terms set out under the LC, he will get the payment. Hence, not having the risk of nonpayment for the goods, the seller can supply goods on the condition that the payment will be delayed (e.g. in 90 days after the bill of lading has been issued).
In case there are no sufficient funds to pay the amount of the letter of credit, the bank may simultaneously finance your trade transactions. The buyer can be sure that the seller will not receive a relevant payment in case violating the preset term of lading and not supplying the goods within the prescribed period and terms.
LC advantages for the exporter (seller)
The seller (exporter) is confident that he will receive the payment for the supplied goods, as in case of LC the payment obligation against the seller shifts from the buyer (importer) to the bank. Due to the letter of credit for export transactions the seller can offer a deferred payment to its partners, which will foster the growth of sales volume, and entering new markets. Moreover, payment for the goods can be received earlier in exchange for the documents set out under the LC for export transactions. Due to a secure mode of payment the seller is provided an opportunity to operate on the international market on much more competitive terms. The seller receives the payment for supplied goods before the goods are supplied to the buyer. The buyer cannot unanimously declare the trade transaction void or change any condition without a seller’s prior contest.
