What is a letter of credit?It is issued by the bank's obligation on behalf of the buyer, directed to pay all the documents provided by the seller, in the case of compliance with all conditions of the contract.Irrevocable Letter of Credit - cashless form of payment is a guarantee of payment.Seller checked all the documents in accordance with international standards.Letters of credit - is an agreement between the seller and the buyer, designed to provide a balance between the two in the case of the foreign operation now for the first time or settling in a new market.
Features
letters of credit The main difference from any other means of payment - in the turnover used only the documents and not goods, that provide these securities.Banks deal exclusively with the documents referred to in the letter of credit, they did not pay attention to other contracts (contracts and any other agreements between the buyer and seller).This is not only an obligation, but also the conditions specified by the buyer, and provided in writing to the Bank together with the application for the opening of a letter of credit.
Letter of Credit - What's that?Points of agreement
The documentation must contain:
- number and date;
- amount;
- view of the letter of credit;
- details of the recipient, the payer, the issuing bank and the performing organization;
- method of execution;
- expiry date;
- term of the documents;
- purpose of the payment;
- need confirmation;
- list of documents and requirements to them;
- payment procedure commission of banks.
Credit can solve the problem when the seller refuses to send items with no guarantee of payment, and the buyer does not want to give money until you get the confidence that everything is delivered in accordance with the terms of the contract.
Types
We have found that the letters of credit - Bank's obligation towards payment of all documents provided by the seller, and understand what must be specified in them.Now consider the types of letters of credit:
- Revocable .The conditions may be amended, it is easy to cancel, without notice to the seller.
- Irrevocable .This can not be canceled and any of his condition changed only with the consent of all parties.
- Transferable .Seller is not the whole party supplier of goods transferred their rights to receive funding in whole or in part to third parties and is accompanied by the necessary instructions to the executing bank.
- Standby letters of credit - is a guarantee of payment in case of default by the buyer's own obligations specified in the contract.
- Revolving .Used for the regular supply of products.The amount of the letter of credit is replenished automatically as payments within the established limit, and its validity.
Pros and cons
Letters of credit - it's absolutely guaranteed to obtain the entire amount from the buyer, careful monitoring of compliance with all conditions of the agreement, a full refund if you cancel the transaction, as well as legal responsibility for the legality of banks' operations, where applicable credit.The disadvantages include the complexity of the documentation and the high cost of this form of settlement of the foreign trade transaction.
