The safest and most common form of transfer in international trade
A letter of credit is a document that connects the buyer, the seller and the bank. All important parts of the sales contract are defined within this document. A letter of credit protects the interests of both parties: the seller is sure that he will be paid, and the buyer is sure that he will receive the goods he ordered. The letter of credit is realized by the seller fulfilling the defined conditions after which the bank pays the full value of the goods. Types of letters of credit Irrevocable and revocable letters of credit. • Irrevocable letter of credit means that payment cannot be canceled, and is used in 99% of cases in international trade. • A revocable letter of credit can be revoked and is rarely used Depending on whether you are a user or a creditor: • Import (nostro) letter of credit: in your name and on your order, upon fulfillment of conditions, payment of obligations to the supplier is made, • Export (loro) letter of credit: is a conditional obligation to make payments to your customer's bank acting on behalf of and on behalf of your customer. According to the method of payment, we distinguish: • At sight letter of credit, in which case the bank makes a payment immediately after the presentation of documents if they are in accordance with the terms of the letter of credit, • Deferred payment letter of credit, in which case the payment is made within the agreed time specified in the letter of credit (usually 30, 60, 90 or 180 days from the date of the dispatch document). Letters of credit with a clause • When there is a problem in the store: fear of losing money, delayed delivery or receipt of poor quality goods, the problem is solved by the buyer not paying in advance, but by using a letter of credit with a third party inspection clause. How much does it cost to open a letter of credit? The price of a letter of credit varies from bank to bank, but also several other factors such as the credit rating of your company and the country in which the user is located. The cost of issuing and using letters of credit ranges between 0.75% and 2.5%. The costs are usually shared by the partners in the trade. Letter of credit opening process The starting point for opening a letter of credit is negotiating the terms of the sales contract. Here, the commercial terms of sale are precisely defined, such as quantity, quality, price, time and method of delivery, etc. After that, you contact your bank and attach the documentation. If your bank does not have a branch abroad, the bank will use a correspondent bank. Banks will communicate with each other with the exporter and importer. The role of banks is to make sure that all documents are authentic and verified. When the goods are produced and accepted by the buyer, the supplier collects the documents required in the letter of credit and forwards them to the intermediary bank for collection of receivables. The intermediary bank then sends the documents on behalf of the supplier to the bank issuing the letter of credit, and if all goes well, the bank makes the payment. The importer pays the full amount of the letter of credit together with the accompanying costs to the issuing bank, in order to submit a request for customs clearance and import of goods.