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How A Letter Of Credit Helps Importers-Exporters In Global Trade?
An international letter of credit is one of the secure methods of payment in global trade to secure high-value transactions. The issuing bank guarantees an exporter to pay the full-fledged amount for delivered goods/services in the event the importer ie. the applicant is unable to pay or at default to do so. Through this, the exporter gets peace of mind of getting paid, irrespective of the buyer's financial capability while the importer also proves his/her creditworthiness towards the transactions.
The occurrence of a global Letter of credit service in international transactions is a result of either foreign government regulations, geographical distance, or a lack of trust between the importers-exporters. This lack of trust leads to a requirement for a reliable & neutral trade payment method that provides a financial safety net to the exporters as well as ensures importers on-time delivery of ordered goods & services.
Let’s see how does an import & export LC work in global trade:
Import Letter of Credit
As the name suggests, an import letter of credit is issued by the importer's bank on behalf of the importer, guaranteeing a timely payment to the exporter for ordered goods in a transaction. Here, since the financial obligation of paying the exporter gets shifted to the issuing bank from the importer, the exporter gets relief from the risk of non-payment or payment failure. Therefore, it reduces the risks of fraud. Important terms & conditions regarding the type, quantity, place of delivery, or delivery time are mentioned in the LC. International letter of credit services makes sure that the transactions go ahead as planned.
Benefits of Import LC:
1. Mitigates Risks - The biggest advantage of an import LC is the reduced risks of fraud. Since the exporters are required to submit the documents proving that the shipment has been done, the importer gets assured of receiving goods. Plus, the T&C of the LC agreements cannot be altered, edited, or changed unless both parties agree.
2. Prove Of Buyer’s Creditworthiness - As the issuing bank takes the responsibility to pay the exporter in case the buyer defaults, it assures the buyer’s creditworthiness to the seller.
3. Further Trade Relationships - The importers can expand their trade worldwide without getting worried about trade fraud.
Recommended Read: What do you mean by import finance and how is it beneficial for a business?
Export Letter of Credit
As mentioned above, when the same letter of credit which is issued by the importer is received by the exporter’s bank, it is an export LC. In simple words, both the import & export international letter of credit services are the same. It’s just a matter of different perspectives.
Benefits of Export LC:
1. Reduces Risk Of Non-Payment - Since the credit risk is transferred to the issuing bank, the exporters get assured of an on-time payment even if the importer defaults.
2. Customizable - An export letter of credit can be tailored or customized as per the convenience of exporters ie. The terms & conditions are flexible.
3. Increases Cash Flow - As the exporter gets the payment before the shipment has been received by the importer, it improves their cash flow and working capital.
In a nutshell, we can say that an international letter of credit service provider plays an important role in the safe & smooth execution of a transaction in international trade. It has different types such as SBLC etc. so figure out your requirements and then apply for a suitable one.
