International trade always includes some uncertainty and risk due to several factors like distance between parties, political instability, country laws, etc. These possibly issues can be avoided when the two parties use a letter of credit, or L/C. An L/C can allow for a smooth deal because they are usually fixed.
When two parties want to make a deal, their banks use these letters to represent their interests and the terms of the negotiations. This way, the guarantees presented in the deal can be fulfilled correctly. Banks will use the letters to make sure all shipping documents are provided for payment to be made. There are also many types of credit letters, which depends on the deal itself. Parties can agree to sight, non-performing, standby, confirmed, and even revocable letters.
A buyer will request a note from a local bank so deem a seller as a beneficiary. The buyer's issuing bank will send the copy of the credit letter to the supplier or beneficiary's advising bank. The advising bank then needs to check the authenticity of the note and send any required documents back to the issuing bank. This would include delivery confirmations that state the goods were received by the buyer within the decided time frame, and also any documents that prove that the terms of the deal were met.
Once the beneficiary has fulfilled its side of the terms and conditions, the issuing bank of the buyer will transfer the pre-determined funds to the advising bank. Once the advising bank receives said funds, it will credit the amount into the account of the beneficiary. One thing to keep in mind is that these letters can be sold or transferred to others because they are negotiable. Therefore, whoever is listed on the letter will receive the funds. Also, if the buyer's issuing bank fails to provide the funds, the advising bank also is not required to credit its beneficiary.
Sight credit letters are types that call for payment immediately after all necessary documents are sent to the issuing bank. Standby or non-performing letters protect the interests of the beneficiary, and provides security in case the buyer does not pay the pre-determined sum of money by the due date. Once the sum is paid by the buyer, this letter can be cancelled.
With confirmed credit letters, the beneficiary will be paid either by the issuing or advising banks. Normally, the advising bank doesn't have any obligations to pay the beneficiary if the issuing bank doesn't transfer any funds. However with this note, the beneficiary will be paid by the advising bank as long as the terms of the letter were met.
The last type of note is revocable. Normally, credit letters are deemed final and irrevocable. However, if this letter was agreed to before the transaction, the issuing bank can cancel or change the entire deal after the process has started.
There are fees the beneficiary must pay. The fees include general payment, advising, reimbursement, communication, and discrepancy. The buyer also is required to pay a fee, but only to open the initial letter. The amount of this fee varies based on the sum of the payments, type of note, and country.
When two parties want to make a deal, their banks use these letters to represent their interests and the terms of the negotiations. This way, the guarantees presented in the deal can be fulfilled correctly. Banks will use the letters to make sure all shipping documents are provided for payment to be made. There are also many types of credit letters, which depends on the deal itself. Parties can agree to sight, non-performing, standby, confirmed, and even revocable letters.
A buyer will request a note from a local bank so deem a seller as a beneficiary. The buyer's issuing bank will send the copy of the credit letter to the supplier or beneficiary's advising bank. The advising bank then needs to check the authenticity of the note and send any required documents back to the issuing bank. This would include delivery confirmations that state the goods were received by the buyer within the decided time frame, and also any documents that prove that the terms of the deal were met.
Once the beneficiary has fulfilled its side of the terms and conditions, the issuing bank of the buyer will transfer the pre-determined funds to the advising bank. Once the advising bank receives said funds, it will credit the amount into the account of the beneficiary. One thing to keep in mind is that these letters can be sold or transferred to others because they are negotiable. Therefore, whoever is listed on the letter will receive the funds. Also, if the buyer's issuing bank fails to provide the funds, the advising bank also is not required to credit its beneficiary.
Sight credit letters are types that call for payment immediately after all necessary documents are sent to the issuing bank. Standby or non-performing letters protect the interests of the beneficiary, and provides security in case the buyer does not pay the pre-determined sum of money by the due date. Once the sum is paid by the buyer, this letter can be cancelled.
With confirmed credit letters, the beneficiary will be paid either by the issuing or advising banks. Normally, the advising bank doesn't have any obligations to pay the beneficiary if the issuing bank doesn't transfer any funds. However with this note, the beneficiary will be paid by the advising bank as long as the terms of the letter were met.
The last type of note is revocable. Normally, credit letters are deemed final and irrevocable. However, if this letter was agreed to before the transaction, the issuing bank can cancel or change the entire deal after the process has started.
There are fees the beneficiary must pay. The fees include general payment, advising, reimbursement, communication, and discrepancy. The buyer also is required to pay a fee, but only to open the initial letter. The amount of this fee varies based on the sum of the payments, type of note, and country.
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