Letter of Credit

Payment is of great importance in international trade. The final result of business activities is to get the amount of money for goods supplied or services rendered. Otherwise, all would be meaningless.

Among all the modes of payment (remittance, collection and letter of credit) letter of credit is the most widely used.

The letter of credit is a kind of bank credit instead of commercial credit like remittance or collection. It is a written document drawn to the exporter by the bank. at the request of the importer. By means of letter of credit,both the seller and buyer are well protected： The exporter is assured of the payment When he dispatches the goods, while the buyer is assured of the title to the goods before he pays for them.

In payment by letter of credit, there are six parties concerned:

☆The applicant: also called the opener, usually it is the importer

☆The opening bank or the issuing bank

☆The advising bank or the notifying bank

☆The beneficiary usually it is the exporter

☆The negotiating bank

☆The paying bank or the drawee bank

There are many kinds of letter of credit among which documentary L/C is the most widely used in international trade. In documentary letter of credit operations, all parties concerned actually deal in documents, instead of goods.

Therefore, banks must examine all the documents with great care to make sure that everything is in accordance with the terms and conditions of the credit.

As a seller, you should always have a clear understanding of your risks in concluding a contract of sale and requirements in relation to the worthiness of the buyer,the political, economic and legal situation in the buyer’ s country and the buyer’ s own liquidity. This helps you to decide what kind of documentary letter of credit you may require--revocable letter of credit, unconfirmed irrevocable letter of credit or confirmed irrevocable letter of credit.