letter of credit

Banking Terms -> letter of credit

• A letter of credit represents a letter from a banking establishment which guarantees that a payment made by a buyer to seller will be received in the specified amount and on time. In case that the buyer cannot pay for the item purchased, the bank has to cover the purchase’s remaining amount. International transactions often involve letters of credit to make sure that payment has been made. The nature of international transactions makes letters of credit important due to factors like different laws, distance, and the impossibility to know all parties in person. Banks act on behalf of buyers as to guarantee that sellers will be paid only after the ordered items have been shipped. Letters of credit are issued by financial institutions most of the time, serving as payment for certain transactions. They are employed in transactions of considerable value in international trade, and the Uniform Customs and Practice for Documentary Credits is applicable. In addition, letters of credit are employed in land development as to make sure that public facilities, which have been approved, will be constructed. These include storm water ponds, sidewalks, streets, and others.
  
  In most cases, the letter of credit is irrevocable, meaning that it is not possible to cancel or amend it without the consent of the confirming bank, the issuing bank, and the beneficiary. The beneficiary has to show certain documents as to receive the payment, including bill of landing, commercial invoice, and documents which prove that the shipped item was insured against damage or loss.
  
  Banks issue letters of credit only after making sure the buyer will pay. Some clients have deposited or have to deposit money, which are sufficient to cover the payment. Other buyers make use of a line of credit to do that. Sellers, on the other hand, have to make sure that they deal with a legitimate bank. Then, sellers are paid only after they perform specific actions, to which both parties (seller and buyer) have agreed to. These may include the delivery of merchandise to a specific location, thus satisfying the letter of credit’s requirements. Once shipment is made, the seller is sent documentation which proves delivery. The item shipped must be paid even if something has happened to the merchandise. The seller should be paid even if the ship carrying the item sinks. The bank reviews the documentation proving that the seller has carried out the required actions. Then payment is made and the quality of goods is not taken into consideration.
  
  Letters of credit are important in international trade, but sellers should keep the following in mind. They have to read all requirements pertaining to the letter of credit before proceeding with the deal. Moreover, sellers have to make sure they understand what documentation is required. There are certain time limits, and sellers should check if they are reasonable. Finally, sellers should ask their service providers how long it will take to produce the required documentation for them.
  
  Documents that have to be presented include official documents such as origin certificate, embassy legalization, license, inspection certificate, etc. The type of documents to be presented is open to negotiation. Shipping documents may have to be provided as well, including insurance certificate, transport document, and other legal or commercial documents. In addition, financial documents, commercial documents (e.g. packing list, invoice), and insurance documents may have to be provided as well. Insurance documents include a certificate or insurance policy rather than a cover note. With these in mind, the payee has to present documentation which proves that the items were sent, rather than showing the actual items.

Payday Loan Canada