A:

You are legally required to obtain a letter of credit to guarantee a successful and risk-free transaction when dealing in international trade. It takes about 12 weeks to process and involves three stages: in-house financing, exterior financing scrutiny and closing. A letter of credit is a payment option offered by a bank to a seller in international trade on behalf of the applicant. The importer is the applicant, and the exporter is the beneficiary. It allows importers to provide secure terms of payment to exporters through the participation of one or more banks. An issuing bank from the country of the buyer issues the letter of credit, while an advising bank from the country of the seller advises the letter of credit to the seller. There are various forms of letters of credit but the safest type is the confirmed and irrevocable letter of credit.

The rationale behind the use of a letter of credit in international trade is to transfer the risk from the real buyer to a bank. The issuing bank merely examines the document and makes payment when all the essential documents are made available by the seller within a given period of time. Despite the necessity of letters of credit, it is better to circumvent them, because they can cause costly delays, bureaucratic involvement and unexpected costs.

As a result of the drawbacks associated with a letter of credit, consider getting one only if your supplier maintains his or her stand about it. You may also check if the country you’re exporting to requires one and if the extra cost involved justifies using it. It can also be a condition required by national exchange controls. The creditworthiness of the customer, risk to export to that country, condition for export to the country, state of political stability of the country and reputation of the country in the international market must also be considered. You may want to try other options if it won’t benefit you in the long run.

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