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 * Letters of Credit


LETTERS OF CREDIT & WHAT YOU NEED TO KNOW

Letters of credit are fundamental components of international trade


WHAT IS A LETTER OF CREDIT (LC)?

MOST OF THE TRADE IN THE WORLD IS CARRIED OUT INTERNATIONALLY. IN ORDER TO
FACILITATE THIS A BUSINESS REQUIRES TRADE AGREEMENTS WITH THEIR PARTNERS AND
COUNTERPARTS. TRUST IS INCREDIBLY IMPORTANT WHEN AGREEING PAYMENT TERMS. PUTTING
THIS ON THE SCALE, AT THE RISKIER END, TRADE CAN BE COMPLETED ON OPEN ACCOUNT
TERMS, WHERE THE RISK OF THE SELLER BARES THE RISK OF NOT BEING PAID. A LETTER
OF CREDIT (LC) MITIGATES AGAINST THE RISK. A LETTER OF CREDIT IS RELEVANT WHEN
THERE IS AN EXPORTER AND AN IMPORTER REQUIRING PRE-PAYMENT OR CONFIRMATION OF
PAYMENT IN ORDER FOR GOODS TO BE SHIPPED. A LETTER OF CREDIT IS AN INSTRUMENT
FROM A BANK, WHICH GUARANTEES BUYERS PAYMENT TO A SELLER IF CERTAIN CRITERIA ARE
MET. IF THE BUYER CANNOT PAY FOR THE TRADE RECEIVED, DUE TO THE AGREED CONTRACT
WITH A LETTER OF CREDIT, THE BANK WILL COVER THE REMAINING PRICE. LETTERS OF
CREDIT ARE FUNDAMENTAL COMPONENTS OF INTERNATIONAL TRADE. THEY ARE GOVERNED
UNIVERSALLY BY A SET OF GUIDELINES CALLED UCP 600, WHICH ARE ISSUED BY THE
INTERNATIONAL CHAMBER OF COMMERCE. A LETTER OF CREDIT IS A PROMISE WRITTEN ON A
LEGAL DOCUMENT THAT COMES FROM A BANK WITH A PROMISE TO PAY THE HOLDER IF THE
HOLDER FULFILLS CERTAIN OBLIGATIONS. OBLIGATIONS INCLUDE PAYMENT WHEN THE GOODS
ARE SHIPPED IF CERTAIN CRITERIA ARE MET. A LETTER OF CREDIT IS USUALLY USED WHEN
THE BUYER AND SELLER DO NOT HAVE AN EXISTING RELATIONSHIP, WHICH IS WHY IT IS
USED FREQUENTLY ON INTERNATIONAL TRADE. LETTERS OF CREDIT ARE INCREDIBLY
SPECIFIC AND A CLOSE ATTENTION TO DETAIL IS REQUIRED. IF THERE IS A MISSPELLING
IN THE CONTRACT OF THE NAME OF THE GOODS THERE MAY BE A NON-PAYMENT, UNTIL A NEW
CORRECTED LETTER OF CREDIT IS ISSUED AND ACCEPTED.

WHY ARE LETTERS OF CREDIT USED?

 * Safe and legally binding
 * Letters of credit offer risk reduction
 * They are efficient, as letters of credit can be raised electronically using
   an online trade banking service.

 * All parties are required to agree when cancelling them.
 * The exporter or payment to the seller is guaranteed payment, providing the
   term of the LC are met

 * Letters of credit are a focus of international trade and allow companies to
   trade safely in unfamiliar markets with unfamiliar suppliers.
 * They allow for safe trading

 * The details of the transaction are transparent.
 * Letters of credit offer clarity, as the goods detailed in an LC are specific
   and well defined.

THE ADVANTAGES OF LETTERS OF CREDITS

 * BUYER
   
   Certain to receive the goods as stipulated in the letter of credit and
   without the requirement of paying for the goods upfront.

 * SELLER
   
   Protected against non-payment with the risk of non-payment being transferred
   from the seller to the bank (or banks).

HOW IS PAYMENT COLLECTED ON LETTERS OF CREDIT?

To receive payment the beneficiary must present documentation of completion of
their part in the transaction to the issuing bank and must present documents
such as; invoices, Bills of exchange or Government Documents.

THERE ARE SEVERAL DIFFERENT TYPES OF LETTERS OF CREDIT, EACH WITH DIFFERING
PURPOSES.

IRREVOCABLE LETTER OF CREDIT

The irrevocable letter of credit allows cancellation or amendments to the letter
of credit by the buyer. Notably the irrevocable letter of credit can only be
processed the buyers bank, seller and the sellers bank agree.

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CONFIRMED LETTER OF CREDIT

A confirmed letter of credit, is a second letter obtained by the borrower, from
a second bank. The second bank promises to pay the seller if the first bank
fails to do so.

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TRANSFERABLE LETTER OF CREDIT

A transferable letter of credit allows the first beneficiary to transfer some or
all of the credit to another party, which creates a secondary beneficiary. ...
an alternative option to advance payments.

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LETTER OF CREDIT AT SIGHT

Letters of credit at sight are payable as soon as the agreed documentation has
been presented and verified, providing protection for the buyer and the seller.

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USANCE LETTERS OF CREDIT

Defferred or usance letters of credit means that the payment to the seller is
delayed until an agreed period of time has passed.

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RED CLAUSE LETTER OF CREDIT

A red clause letter of credit permits the seller to receive partial payment from
the issuing bank prior to shipping products or performing the services.

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GLOBAL TRADING CAN HELP

AT GLOBAL TRADING WE HELP COMPANIES FIND DEBT FUNDING IN THE MARKET, WITH
VARIOUS FINANCE INSTRUCTORS TO MEET THE BUSINESSES VARIOUS NEEDS. IN TURN THIS
WILL EXPLAIN DEBT TERMS TO POTENTIAL CLIENTS, HELP GROW YOUR CLIENTS AND
RECOGNISE FUTURE CASH FLOW CHALLENGES.



IF YOU NEED FUNDS, FINANCE OR LETTERS OF CREDIT FOR GLOBAL TRADE, PLEASE DO NOT
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