A business letter of credit is an essential tool in the trading industry. In simple terms, it’s a letter issued by the bank, which offers the vendor assurance of receiving their payment, and buyers are assured of receiving their goods. Wondering why it’s given such high importance? Well, if the buyer is fails to comply with this condition, the bank will then have to take responsibility and fulfil the payment. This letter becomes even more crucial when dealing with a foreign business, as there are many factors that have to be taken into consideration such as the distance, laws in both countries, which are certainly going to differ, as well both parties not knowing each other on a personal level.
The Importance of The Letter
Given that there are various methods of receiving payments either from vendors or customers, a letter of credit (LC) becomes an essential tool of your business. While cash, check and wire transfers are often the most preferred modes of payments by companies, transactions with international companies can be quite a challenge. A letter of credit comes handy in such situations. Through the LC the vendor is offered assurance of receiving payment without having to go through the usual personal guarantee or verbal agreement.
When preparing quotations, it is worth noting that banks only make payments of the amount specified in the letter. So, in case higher charges are incurred either due to shipping insurance or any other factor, they will not bear the cost.
Benefit of The Letter
The key benefit of this letter is that is lowers the risk involved, especially when the seller is dealing with a foreign client. Before making the payment, the exporter has to submit a document as proof that the goods have been shipped. Only after this will the importer complete the payment process. The terms and conditions stated in this letter cannot be amended unless agreed by bother parties, therefore ensuring a legal process.
Drawback of The Letter
The drawback of the LC is that the bank issuing the letter has to pay a certain amount to the exporter upon submitting the documents listed in the letter. There is a slight risk associated as goods may either be damaged or delivered in an unsatisfactory condition, further putting the bank on the hook for payment.
Visit Capital Dubai to avail of a commerce letter of credit for your business or learn more about this service.