You may be confused by the many international payments available to you when you are making international transactions. You will hear about letter of credit when you are looking at these payment methods.

This article provides basic information on the letter credit. It includes import L/C and export L/C, letter of process credit and other types.

What is a Letter of Credit (Letter of Credit)?

Letters of credit are a popular payment method in international transactions. You may worry about payment and delivery of goods when you do business with clients from another country. You may worry about the payment and delivery of goods when you do business with customers from other countries.

Two banks will be needed in this situation to guarantee the transaction for both parties. The bank will issue documents according to credit terms and make payments either at sight or in advance, depending on the requests of the applicants (usually importers). Documents are used, such as the letter of credit. It is generally a type of conditional promise to pay.

Export L/C & Import L/C

What is lc Imports?

Import L/C is a document issued by banks to applicants (importers), and sent to beneficiaries (exporters). It is used to provide proof of credit so that importers may take delivery.

What is Export lc?

Export letter of credits are usually considered to be the import letter that is issued by the issuing and remitting banks. Exporters can take advantage of a number of services, such as credit notices, receipt and submission documents.

Export L/Cs allow exporters to ship their goods before they are paid and make sure that the payments received by the exporter comply with the L/C’s terms and conditions.

Export lc vs Import lc

The beneficiary of an import letter of credit can be either the exporter or seller. The export letter of credit is automatically created once the import L/C was confirmed by the exporter’s bank.

The L/C is a great way for importers to keep their cash flow, as they can only pay exporters after they ship the goods. This also shows your credibility to the seller.

Exporters can use the L/C in the event that the importer does not pay you after you have sent the goods. In this situation, the bank will complete the payment and the L/C protects you from legal risk. You can think of it as a guarantee for your capital, ensuring that the transaction will be successful.

How Does a Letter of Credit Work?

You may be interested in learning more about the use of the Letter of Credit for international transactions. This section will explain the letter of credit process in detail.

The following steps are the main parts of the entire process of a letter of credit:

Step 1: Issue a letter of credit

After both parties have signed a contract and reached a commercial agreement, the importer must apply to the bank issuing the letter of credit, which will be in the favor of the exporter. The L/C is then sent by the issuing to the advising banks. This bank will verify the credit’s authenticity and then send it to exporter.

Step 2: Sending documents and processing them

The exporter must check the credit and then prepare the shipment in accordance with the contract. The exporter diligently prepares and promptly sends the required documents to the bank for reimbursement. The bank processes and sends the documents on to the issuing banks for the claim. The bank can help you process the documents by confirming.

Step 3: Pay and notify Applicants

The issuing bank pays the reimbursement bank after receiving the documents. It then sends the bills to the applicant, and notifies him of his retirement documents.

Step 4: Complete the payment and take delivery of your goods

After that, the applicant takes delivery of the goods and documents. The applicants then complete payment to the issuing bank.

Does the letter of credit have any security?

Letters of credit are much more secure and reliable than other forms of international payment, such as online transfers. It is because no less than 2 banks are involved to ensure safety and security.

It is possible to cover a wide range of countries and areas with L/C. It can reduce the distance between importers and exported to reduce the trade risk and shorten transaction time. If your business is large, you can rely on L/C.

Letter of Credit: advantages and disadvantages

All international payment methods are affected by restrictions imposed by different factors such as countries, currencies and regions. This can have both advantages and disadvantages. The letter of credit is explained in this section, so you know the pros and cons.

Benefits of Letter of Credit

  • With various terms and conditions, it is safe and reliable both for parties.
  • L/C guarantees transactions by banks and helps to complete cross-border transactions successfully between the two parties.
  • L/C is a way to reduce the uncertainty in payments by importers, and make exporters more accountable for their goods.
  • Both parties can negotiate when they sign a contract and choose L/C for payment. Both parties can agree on the payment conditions.
  • The credit agreement would be used to help both parties resolve any disputes that may arise.
  • L/C can be used to expand the market and help establish new business relationships and trades between partners.

Letter of Credit: Its Advantages and Disadvantages

  • This method of payment is not appropriate for small businesses.
  • Banks would charge more fees compared to other payment methods. Both parties will also be charged extra fees for additional services.
  • The letter of credit is valid for a certain period. Both parties must complete the key aspects of the transaction within the time frame. This can sometimes cause a mess.
  • It is inevitable that the transaction will be delayed in the event of any change to the terms or conditions of the L/C. The contract may not be very flexible.

There are 8 types of letter of credit

There are many different types of letter of credit, depending on the factors and requirements of both parties. This section will give you a list of the most common L/C types to help you decide if it’s right for your business or transaction.

According to their payment terms, sight L/C or usance L/C are available.

Sight Letters of Credit

The letter of credit is a document that allows the bank to make immediate payment upon receipt of the draft , shipping documents, or other documentary draft .

This type of credit can be used much faster than other types of credit.

Use Letter of Credit

The term Usance Letter of Credit (also Acceptance Credit or Time credit) refers to the fact that either the issuing or payee banks receive the documents of credit, and then make the payment within a certain period.

The importer, for example, places an order at the exporter’s office and receives the goods within one day. The order bill will be delivered along with the goods. If the LC stipulates a credit period, such as a month, importers do not have to pay the goods immediately. This means they can complete the payment within the time period.

Letters of credit can be classified into two categories based on the standards set by issuing banks.

Revocable Letters of Credit

The beneficiary is not notified when the credit type can be modified by the buyer, the importer, or the issuing institution. Revise the letter’s terms or cancel it.

Revocation of a letter of credit can be done for many reasons. As buyers, it is important to remember that you must have a reasonable reason for rescinding the letter of credit, otherwise you will lose credibility with sellers.

Unrevocable Letters of Credit

Only with approval from the beneficiary and the request of the buyer, can the bank that issued the irrevocable letter change or cancel the credit. The issuing bank cannot amend or cancel a credit without the consent of both parties.

This type of letter is used more often and more widely than a revocable one. It can balance the interests of the two parties to prevent many problems.

Other forms of letter of credit are used in international transactions. Here are four types as a reference.

Letter of Credit Confirmation

A confirmed letter of Credit is one where another bank, the confirming bank, adds a security to the letter. The confirming bank will make the payment if the issuing institution fails to complete the transaction.

In transactions, only the irrevocable letters of credit are accepted. Exporters who doubt the credibility of their first issuing banks can insist that the importer obtain the letter of credit.

Unconfirmed letter of credit

Unconfirmed Letter of Credit is a credit that only has the issuing bank as the confirmer or security. This credit is usually used less in cross-border trades than a confirmed letter of credit.

Transferable Letter of Credit

Transferrable letters of credit allow the first beneficiary to be either an intermediary between the seller and the buyer of the goods or services or a grouping of suppliers. The beneficiary can then present the credit documents, transfer part of or the entire payment, and pay the second beneficiary.

The letter of credit must clearly state “transferable”. Transfers are only permitted once.

Standby Letters of Credit

When the importer does not pay, the standby letter is used to guarantee the payment of the bank. The standby letter of credit ensures that the exporter will receive payment from the bank if the importer fails to make a payment.

This is more likely a legal document and not a general letter of credit.

The End

This article should help you better understand the differences between import and export L/C. You can read more articles about international payment methods on our website:

Wozo Sourcing is a leading sourcing agency in China. Please CONTACT US if you are interested in starting international trades, but have no experience with importing or customizing Chinese products.

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