A letter of credit is a letter from a financial company, in your behalf, declaring that you intend to loan money. Both the importer and you, the exporter, can get along well because the bank serves as the foremost guarantor, aiding the whole transaction process. Thus, tendency of defaults and risks are drastically minimized. You will receive guaranteed payment, the chance to structure the delivery schedule according to your interest, obtain finance due to production and by purchase, and reduce production risk in case, the buyer cancels or changes his order. Here are ways by which you can manage a letter of credit for your advantage:
- It is always good to be candid or direct in laying down your terms and conditions with your buyer or seller. Before you write them up a letter of credit, make sure that you provide them with a clear statement of prices and prospective.
- Right after the letter is furnished; you have to get in touch with your buyer or seller and discuss documents purposely. This is essential for the bank to discharge payment. Be careful not to cause any misunderstandings, which may later outlay someone’s money.
- The exact requirements for the documentation must be double-checked with the bank. If you feel that there is a good agreement between you and the other party you’re dealing with, you may confirm that this will also work for the bank. The bank will require from you documents, to see the congruency of it with the letter of credit. However, the bank can either check the details or not. The letter of credit is important for the seller to receive release of payment because it primarily serves as a rubric or basis as to what certain documents are needed to check on like banking, shipping, etc.
- You must have the same opinion with the other party regarding the process of sending the letter of credit. You may prefer to use either electronic system or postal methods with clarity. There can be a serious barrier to transaction if ever the letter of credit gets lost.
- The entire progression will flow nicely by not underestimating the vitality of picking up a phone a few times. You should know who you trade with. It is an advantage to at least acquire some information about each other so transactions can be manageable. It is not safe to trust foreign parties.
A letter of credit makes you receive punctual payment for products because you are negotiating with a bank. The importer can feel secure and satisfied that you cannot violate the contract due to a strong guarantor—the bank. In the end, both you and the importer are receiving benefits. The imported products will be delivered in harmony with all specified conditions in your letter of credit and the agreement will be followed promptly. The letter of credit’s function is comparable to an insurance contract for both buyer and seller because it actually eliminates the danger of having high credit risk for both parties, thus reducing payment delays.