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Understanding Letters of Credit

Understanding Letters of Credit

Importers regularly use letters of credit to protect themselves. Working with an overseas buyer can be risky because you don’t really know who you’re working with. A buyer may be honest and have good intentions, but business troubles or political unrest can delay payment (or put a buyer out of business).

In addition, communication is difficult across thousands of miles, different time zones, and different languages. A letter of credit spells out the details so that everybody’s on the same page. Instead of assuming that things will work a certain way, everybody agrees on the process up front.

Example

You find a manufacturer or supplier of goods. The manufacturer has no way of knowing if you the customer can (or will) pay for the goods after they’re produced and made ready for shipping.

As a result, the purchase and sales agreement states that the manufacturer will get paid using a letter of credit as soon as shipment is ready.

You, the buyer will need to apply for a letter of credit at a local bank, this can take many weeks and will often prove restrictive or overly complex and time consuming. You may need to have funds on hand at that bank or get approval for financing from the bank which will often prove problematic.

The bank will only send funds to the seller after the seller proves that the shipment is ready. This is typically done by providing documents that show what was delivered, and where. In some ways, the buyer also enjoys protection under a letter of credit: some buyers would rather pay a bank than send the money directly to a seller.

Importwise have made this process simple and more efficient.

Letter of Credit Lingo

To better understand letters of credit, it may help to know the following:

  • Abbreviations for ‘letter of credit’ include L/C, LC, and LOC
  • Applicant – the buyer in a transaction
  • Beneficiary – the seller or ultimate recipient of funds
  • Issuing bank – the bank that promises to pay
  • Advising bank – helps the beneficiary use the letter of credit
  • Irrevocable – the letter of credit cannot be changed or canceled without permission from everybody involved

Getting a Letter of Credit

Importwise have streamlined the often cumbersome and slow process of obtaining a letters of credit. With banks taking many weeks and often refusing to process due to complex and restrictive requirements. Letters of credit are one of many ways you can pay suppliers with importwise using our simple and intuitive online platform. We are always on hand to discuss your specific requirements.

 

ImportWise lets you simplify and streamline your global payments process, Improve the accuracy and speed of your payments, settle purchase orders with bank beating rates. All from your intuitive dashboard.

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