International Trade – Importance of Letter of Credit

The Letters of Credit give importers the most extensively used and conventional international trade payment means and finance instrument. By making Letter of Credit terms to permit Deferred Payment or Trade Acceptance, a Letter of Credit facilitates financing to the importer. It promises payment, provided the seller complies with the terms and conditions inside the Letter of Credit. The Irrevocable letter of credit can’t be canceled or varied without the approval of all parties.

A bank issues an import letter of credit (L/c) on the behalf of buyer or importer under the following conditions:

a)      When an importer is importing items within its own nation

b)       Any act of merchandise where products from the nation is sold to another commercially

c)      When exporter from India who is executing a contract outside his own nation needs importing items from a third nation to the nation where 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 payments related with this sort of trading though. The issuing bank charges the applicant costs for opening the letter of credit. The fee charged depends on the credit of the applicant, and primarily consists of:

A)    Opening Charges: This comprises of promise and procedure charges for the time of the letter of credit.

B)     Retirement Charges: This is to be remunerated when the time of letter of credit ends. The bank offering the letter analyzes the bill according to UCPDC (Uniform 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 risks consist of: Financial Standing of the Importer, the products involved ,the exporter, nation risk and foreign exchange threat.
• Price risk is another vital factor related with all forms of international trade. All banks evaluate their risks on the above mentioned criteria before issuing the letter of credit.

Import Letters of Credit provide importers the most broadly used and accepted worldwide trade payment mechanism and business instrument. By structuring Letter of Credit terms to permit Deferred Payment or Trade Acceptance an L/C can be operated to offer funding to the importer.  Most prominently global trading has a whole lot of money involved and if done appropriately could build up a turnover capable of running a nation state’s budget; hence it is significant that it is managed with care.