Regardless of whether you are a supplier or a customer, a documentary letter of credit can reduce payment risks for both parties, both abroad and at home
for a supplier, a letter of credit creates an irrevocable commitment that the customer’s bank will pay for supplies when the customer’s predefined terms and conditions are met. There is no need to consider the customer’s willingness or ability to pay,
you can also sell the receivable underlying a letter of credit to the bank before the maturity date to improve your cash flow,
as a supplier, you can eliminate the territorial risk of a country of export with a letter of credit confirmed by a local bank,
as a customer, you can be confident the price will only be paid on delivery and only if the terms and conditions agreed in the letter of credit are met. Proper formulation of these conditions is an effective way to treat risks affecting the transaction (e.g., terms and conditions of delivery),
as a customer, being able to provide your counterparty with a high-quality guarantee of payment gives you a good negotiating position to obtain longer payment periods or more favourable prices.
an irrevocable written commitment of the bank to pay a specified amount to a supplier when the letter of credit terms and conditions defined by the customer are met,
one of the safest and most highly developed payment instruments for international and domestic trade,
combine a guarantee and a payment function.
you need to minimise the risk of trading with new or exotic markets,
you lack experience or have negative experience of the customer’s payment discipline,
the use of letters of credit is customary or required by a regulator in the relevant market,
as a customer, you want to be sure that payment will not be made if your predefined conditions are not met,
as a supplier, you need a high-quality guarantee of payment.
the supplier and the customer agree to conclude a contract for payment based on a letter of credit,
the customer asks their bank to issue a letter of credit in favour of the supplier,
after receiving notice of the opening of the letter of credit, the supplier ships the goods,
the supplier submits delivery documents through their bank to authorise payment,
the customer’s bank makes payment on fulfilment of the agreed conditions and releases the documents to the customer.
