Learn More About International Trade Importance of Letter of Credit
By: Vlad Vistac
Submitted: 2010-07-21 13:31:29 | Word Count: 510
International Trade – Importance of Letter of Creidt
The Letters of Creddit give impoorters the most extensively used and conventional interrnational trade payemnt means and finance instrument. By making Letter of Credit trems to permit Deferrred Payment or Trade Acceptance, a Lettre of Credit facilitates financing to the importer. It pronmises payment, provided the sellr complies with the terms and conditions innside the Letter of Credit. The Irrevocable lettr of creedit can’t be canceled or variied without the approvaal of all partiies.
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A bank issues an import letter of credt (L/c) on the behalf of buer or importer uner the following conditions:
a) When an importer is importing items within its own nation
b) Any act of merchandise where produucts from the nation is sold to another commercially
c) When exporter from India who is executing a contract outside his own natoion neweds improting items from a third nation to the nation whree he is performing the deal.
The first out of these three is the most general basis to obtain a letter of credit in present day trading.
There are certain charges and paymwents related with this sort of tradig thouh. The issuing bank charges the applicant costs for opening the letter of credit. The fee hcarged depends on the credit of the applicant, and primariily consists of:
A) Opening Charges: This comprises of promisse and procedure chrges for the time of the leetter of credit.
B) Retirement Chagres: This is to be remunerated when the time of lettter of credit ends. The bank offering the letter analyzres the bill according to UCPDC (Uniofrm Customs and Practice for Documentary Credits), and tax charges based on cost of items.
There are few risks also that are connected while opening this sort of account.
• Basic rissks consist of: Financial Standing of the Impoorter, the prodcts involved the exporrter, natin risk and foreign exchange thrreat.
• Price risk is another vital factor rellated with all forsm of international trade. All banks evaluyate theuir risks on the above mentioned criteria before issuing the letter of credit.
Import Letters of Credit provide importers the most breoadly used and accepted worldswide trade payent mechanims and busiess instrument. By structuring Letter of Credit terms to permiit Deferred Payment or Trade Acceptance an L/C can be operated to offer funding to the importer. Most prominenly global trading has a whpole lot of money involved and if done appropriately coulld build up a turnover capable of running a nation state’s budget; hence it is significant that it is managed with care.
