Letters Of Credit And Their Role In Exports

Business interested in penetrating new markets to improve their bottom lines by increasing sales or reducing costs, are attracted to international trade.

In the case that a company decides to take international trade seriously, imports and exports will change the way it does business. The risks are always related to how successful it is in the markets it enters. The bright side is that the business may decide to stop exports or imports if business is not profitable.

Companies have different ways of protecting themselves legally against risks and also to increase their financing. The most common ways of doing is by using factoring, bank guarantees, and the popular letter of credit.

A letter of credit is a credit document that allows the exporter and importer to safely and reliably do business.

The letter of credit is a crucial part of the recipe when it comes to trade done outside borders. These documents have many useful features that make imports and exports easier and more reliable. The letter of credit is grounded on international trade practices and regulations. It establishes what the parties are expected to do, what documents are required for the transactions, and the terms both exporter and importer agree beforehand. A letter of credit works as a guarantee that the transaction will be done as agreed.

The Letter of Credit is the promise given by a bank (Issuing Bank), acting on instructions from its customer (payer) to pay certain sum of money to a person or company (Recipient), through one of its correspondents Bank (Notifier), provided that certain requirements are met, such a rule, are the delivery of documents within a stipulated date.

The letter of credit is always a documentary credit that the beneficiary (exporter) can only rotate on it through its presentation.

A letter of credit will provides the formality and legal structure sufficient for transactions to be done properly. It evidences that the merchandise arrive in the conditions expected.

The letter of credit creates an international triangular relationship where one or more banks serve as mechanisms for payment of the price, while the transfer of goods continues to be a direct relationship between the exporter and importer, but in which the bank says that the importer paid only if the beneficiary presents the documents (certificates of shipment commercial invoices, etc..) demanded in the letter of credit.