One of the most important financial tools for international trade, the documentary Letter of Credit is an effective solution that helps eliminate risks for both the buyer/importer and the seller/exporter.
Most Letters of Credit are governed by rules known as Uniform Customs and Practice for Documentary Credits, which are set by the International Chamber of Commerce. There are a number of benefits to using a Letter of Credit:
- The buyer is able to buy the goods and pay for them after shipment of goods
- There is no financial risk to the buyer if the goods are not shipped after the order is placed
- The issuing bank extends its credit to the buyer which helps him to buy from new vendors
- No funds are blocked until documents are received after the shipment, thus improving cash flow
- The buyer is assured that goods are shipped on time, failing which there is no liability to pay
- The seller does not run the risk of cancellation of the order as the Letter of Credit is irrevocable
- Payment is assured after shipment on submission of documents complying with the terms of the Letter of Credit and other conditions. So he does not run the risk of non- payment after the shipment
- It helps to raise finance for production of goods thereby meeting working capital requirements
Global trade is one of the most important cogs in the machine of the global economy. To keep that cog in motion, the appropriate financing is required. Trade finance has become an integral component of modern trade, a crucial element in covering what is commonly known as the trade cycle funding gap. In other words, providing the financial security required for a transaction to take place between any buyer and seller
- Letter Of Credit
- Letter Of Guarantee
- Bank Guarantee
- Standby Letter Of Credit ( SBLC )
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