Letter of Credit in Foreign Trade

This joint work also includes standardized documents and methods to ensure that sellers and buyers in the market can protect their goods and make deals effectively.Previously, we mentioned the main payment methods for international transactions, so this time we want to go into detail on one of the most used: letters of credit.

What is a letter of credit?

The letter of credit is a written document presented by the importer's bank on behalf of the importer. Through this document, the exporter obtains a guarantee that the issuing bank will make the payment for the merchandise sold under the established terms and deadlines.

It is worth mentioning that the importer's bank will make the payment based on the delivered documents and does not require to ensure the physical delivery of the goods. In that sense, if the documents are aligned with the terms and conditions of the letter of credit, the bank will not be able to deny the payment.

Who issues a letter of credit?

It is issued by the importer's bank in the importer's name to guarantee that the institution will make the payment for the merchandise.

Characteristics of a letter of credit

What charges are there for a letter of credit?

There are some costs or charges associated with letters of credit, which may include:

• Opening charges, as well as commitment fees, advance payments and the fee for issuing the letter of credit.
• Withdrawal charges applicable at the end of the period. They can be costs for consulting by the bank, regulatory obligations of the countries, charges of the exporter's or importer's bank.

To be sure which ones are applicable, be sure to check the terms and conditions in detail, as well as check with your bank all applicable fees or charges.

How is the process to use the letter of credit?

Step 1. Buyer (importer) and Seller (exporter) agree to use letter of credit as payment method.

Step 2. The importer requests the letter of credit from his bank so that it is issued as beneficiary to his exporter.

Step 3. The importer's bank forwards the letter to the exporter's bank.

Step 4. The exporter's bank verifies the authenticity of the letter and sends it to its client (exporter).

Step 5. The exporter sends the merchandise

Step 6. Once the shipment has been made, the exporter sends the documents to his bank, the documents that show that the shipment was made.

Step 7. The documents are forwarded to the importer's bank.

Step 8. Once received and verified, the importer's bank sends them to the importer for payment to proceed.

Requirements for the letter of credit

One of the main aspects of this method is that it is vital to enter the documents in a timely manner to align with the terms and conditions of the letter of credit. Any failure to adhere can lead to non-payment, generating delays in those willing to pay.

On the other hand, you must thoroughly analyze all the options to choose the banking institution to carry out the Letter of Credit process, since the clauses and related costs also affect its effectiveness as a payment method.