Letter of Credit.

Letter of Credit - is a financial transaction in which the bank earlier issued instructions to the side of the beneficiary bank.Banking manipulation is carried out at the initiative of customers, on their behalf, in accordance with the partnership agreement.The commission is to conduct payments natural or legal person under the conditions specified by the order.Examples

perform banking operations

examining the concept and types of letters of credit, dwell on the fact that the format of settlements through the bank has both the positive aspects and disadvantages.The letter of credit can be called contingent liabilities, which is accepted by the bank at the direction instructing party, according to which the financial institution agrees to make a payment to the Beneficiary in the amount specified in the documents.This determines the highest level of security and acts as a guarantee that none of the parties would be deceived.You can describe the situation easier.For example, one firm wants to buy a particular product from the other, but because of the risk is not willing to pay for it immediately.In this situation, the bank asks the buyer pay for the goods for him, giving him a receipt that the implementation of payment whichever is later, upon receipt of the goods.Bank transfers the funds to the seller a certain amount, and then, on the basis of receipts, impose any funds from the buyer.Settlements with the bank and the parties in a format known as letters of credit issued.Forms define the individual letters of the subtleties of the partnership between the four parties.

letter of credit as a form of risk minimization

When forming partnerships between the entrepreneur and the organization, as well as between individuals and entrepreneurs, there is a high risk of losing money or goods in the contract or mutual.Presented in banking types of letters of credit avoid significant losses in transactions with large amounts.Minimizing risk is due to the fact that any financial process under the letter of credit is implemented with tight control at the same time by the two banks.Failure to comply with terms of agreement with each of the parties completely excluded.Supplier, in fact, as its buyer simply can not perform its obligations under the partnership.

Types Credits

When using letters of credit during the settlements is very important to choose the appropriate type of operation.Opening of bank last performed exclusively at the direction of the payer, hence the choice of the format operation is for the payer.Information regarding the alleged subtype banking operations entered into the contract.In accordance with the standards of the Central Bank decided to allocate the following types of letters of credit:

• coated or deposited.
• uncoated or guaranteed.
• Revocable.
• irrevocable.
• confirmation.It can be either revocable or irrevocable.

coated and uncoated banking

Deposited and guaranteed operation - is the most common letters of credit issued.Types of letters of credit is the specification of the operations themselves.

• Covered surgery.In this situation, when you open a letter of credit issuing bank carries out the transfer of funds to the account of the payer all size of the credit.This is called covering.Funds transferred to the custody of the bank for the entire Executive term of the contract.
• uncoated operation.Guaranteed bank transaction at the opening of the letter of credit provides for the transfer of funds by the issuing bank.Simply executing bank shall be entitled to debit with his existing accounts within the cost of the credit.The order of procedure for writing off funds from the correspondent accounts in the Issuing Bank, is determined by special agreements between financial institutions.

Variations confirmed banking transaction

confirmed letter of credit, types of which may differ depending on the specifications of transactions (revocable and irrevocable), a letter of credit under which the executive financial institution is committed to making the payment regardless of whether the transferthe money from the bank, which has been issued confirming the letter of credit.The procedure for the harmonization of the nuances of operation is determined by interbank agreements.The answer to the question of what the combination of types of letter of credit is not possible, lies precisely in the above definition.Other tandems are simply unacceptable.

revocable and irrevocable transaction

No less popular during the settlements is considered as a revocable or irrevocable letter of credit.Types of letters of credit in this category also have their own specifics.

• revocable living banking operation can be upgraded or completely canceled by the issuing bank.The grounds for refusal may serve the written order of the payer.Harmonization with the recipient of the funds in this situation is required.After the revocation of letter of credit issuing bank shall not be liable to the payer.Trouble-free operation
• may be revoked only in that situation, if the recipient has given its consent to the change in the conditions of partnership and give it to the executing bank.Partial change of conditions for this category of settlements is not provided.

recipient of funds in the banking operations has the right to refuse payment, but before its expiry date, and provided that this caveat stipulated in the contract.Allowed by appointment and the acceptance of a third person who is authorized by the rights of the payer.

Varieties major formats banking

There are not only the basic types of letters of credit, but also their species.We can mention the following modifications banking operations:

• red clause.This agreement, according to which the issuing bank provides the right to perform the work at the bank in the form of an advance payment to the supplier of the goods.The amount of the advance payment is determined in advance and is available until the moment the service is provided or the shipment of goods.It is these types of letters of credit in the international payments are most in demand, as it increases the level of trust between the parties.
• Revolving operation.It is a letter of credit, which opens partly to payments under the contract amount.It is automatically updated as the calculation for each of the consignments or for a certain amount of services.To reduce the cyclical monetary amount of the contract at the systematic supply the perfect credit.Types of letters of credit in this category are popular.

Mutual

When concluding contracts in the form of agreements must be indicated settlements and especially the delivery of goods or the provision of services to the scheme.Be sure to register in the securities of planned types of letters of credit and their characteristics.To avoid problems, the paper should contain the following information:

• name of the issuing bank.
• name of the financial institution that will provide services to the payee.
• The identity of the payee.
• size of the banking operations.
• Types of documentary credit that will be used.
• Format inform the recipient about the opening of a bank transaction.
• format information on the payer's account number, which is designed for the deposit money.The account is opened executive financial institution.
• The validity of the letter of credit, terms of documents and rules on their execution.
• Specification payment transaction.

notes

order for the partnership is successful, the payer must independently or with the help of a specialist to examine the format of banking operations, focusing on who uses what kinds.Letters of credit varies depending on the size of settlements.For the particular case you need to choose the optimal format of partnership.It is said that in the event of payment format the entire responsibility rests with the financial institutions, in accordance with the law.This determines the fact that the representatives of financial institutions especially attentive to check the documentation that confirms the delivery of goods, performance of a certain volume of works or services.

advantages and disadvantages

for this type of cashless payment inherent pluses and minuses.On the positive side the partnership should include the provision of a 100-percent guarantee of the payment to the seller of goods or services representative.Control over the implementation of the Settlement of the transaction is implemented by the financial institutions, which eliminates the risk of fraud and the proper performance of the obligations of each party.In carrying out banking operations, thanks to the postponement in the payment, the buyer withdraws part of the capital from economic circulation.Payment for goods or services is carried out as if in installments.At the time of signing of the agreement means in the hands of the buyer can not be.The same time acts as a disadvantage, but the seller of goods and services representative.They get the money deferred.It is worth mentioning that the letter of credit scheme of partnership is very complex to understand it just did not happen.However, the world practice shows that the businessmen who took advantage of the offer once, never use other payment formats.The advantage in terms of high levels of safety completely covers a complex scheme document and relatively high bank charges.