Use Letter of Credit (LOC) as payment mode for import export transactions?

Uniform Customs and Practice for Documentary Credits regulates the  rules for Letter of Credit. A letter of Credit is a document which is issued from bank giving an assurance to Beneficiary (Seller) that he will receive his payment from Applicant (buyer). Receiving of  payment is up to the amount as it is  specified in Letter of credit to the extent of  some documentary delivery conditions that  have been met. LC mentions what are the  documents a beneficiary would provide, what information these documents would  contain and the place and date if it expires. It is the  buyer’s bank that makes LC on agreed terms between the parties. In case, an applicant fails to make payment, then the bank’s role will begin. The bank will then inspect the terms of the letter and if it  finds suitable it  would honor the  beneficiary’s demand.

Letter of credit is an assurance which is  given by the buyer’s bank in order  to remit the amount to the seller through seller’s bank on maturity, as per the terms and conditions of the  documents that are  based on the contractual agreement between the buyer and the  seller. Now in simple words, If LC is opened on your name, then  you will receive the amount though the buyer’s bank on the agreed time. All the Letter of Credits for  export import trade is handled under the guidelines of the  Uniform Customs and Practice of Documentary Credit of International Chamber of Commerce (UCP 600).

There are thus  various types of letters of credits like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back etc. The most common and safe LC is Irrevocable Letter of Credit.

Though expensive, it is considered as the most reliable source of making payment as it provides security to both buyer and seller. Coordination between buyer and seller is difficult as both are far away and for this purpose, letter of credit provides authenticity and guarantee regarding making of payment as long as document delivery terms are satisfied. LC assures timely payment which provides seller extra time to anticipate his future marketing plans. Remember, LCs have expiry date, so keep a check on it. Amendments should be made whenever there is a change in terms and conditions. An import export code is also necessary for this process.Which can be obtained online from LegalRaasta .

Many exporters have unanimous view regarding LC as it gives guarantee of delivery of goods and payment. It is also known as Documentary Credits. We can also term it as Promise Letter for the safeguards it provides to seller/beneficiary and assurance to buyer/applicant.

Parties involved in LC:-

  • Importer/Applicant and Exporter/Beneficiary.
  • Issuing Bank that opens up LC.
  • Advising Bank that gives advice to beneficiary on LC.
  • Negotiating Bank that negotiates documents received under LC.
  • Reimbursing Bank that makes reimbursement of the demand under LC.
  • Confirming Bank- The LC made by Issuing Bank gets the confirmation by the exporter’s bank. This bank undertakes responsibility of making payment at time of credit.
  • Paying/Nominated Bank that readies to pay demand of Exporter.

If you want to Apply Import Export Code, you can go with Apply IEC Online.

Related Post: How to send your export product samples to foreign buyers?

By |2018-10-29T12:23:59+00:00September 5th, 2016|Others|

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