Letter of credit plays an important role in international business. They are generally issued by bigger banks in order to pay a seller upon receipt of merchandise by a buyer provided the conditions stated in the letter have been fulfilled. You should keep in mind that the letter of credit submits documents for the goods instead of the goods themselves. Banks do not play any role in probing goods on behalf of their customers. Normally the documents applied for include a commercial invoice, a transportation document and an insurance certificate.
In spite of the fact that the letter of credit is considered the most reliable means of payment, but the exporters should keep in their mind that they have not total control over the process of payment. The requisite documents in this regard are commonly prepared by other people who may not meet the strict compliance standards essential for payment. It has been observed that sometimes banks which have not been properly guaranteed their own reimbursement by the buyer, apply very narrowly letter of credit principles to refuse payment.
In order to secure your payment, carefulness, knowledge and certain safety measures can greatly shrink your risk. The governing rules of letter of credit are codified in a publication backed by the International Chamber of known as the Uniform Customs and Practice for Documentary Credits. The professionals of this field advise the exporters to fully understand them. The bank is not worried if the contract between buyer and seller is being carried out according to its stipulations. Its only concern is whether the documents presented by the seller match with the documents required under the letter of credit as well as the documents are offered within the required time periods.
If you intend to have some control on payment process, you may want to choose a bank you are familiar with. It means that during the bargaining, the seller should persuade the buyer to make use of a bank of seller‘s choice in issuing the letter of credit. The seller should find out, if possible, a bank with a considerable international presence. This bank must have presence in the country of the buyer. In this way the process may proceed more speedily. The seller in his best interest must ensure that the bank used by the buyer should be well known as well as highly regarded by the banking community. If the seller takes keen interest, the staff of his own bank can disclose information on the financial status and standing of the foreign bank.
In case the buyer is not satisfied with bank of buyer’s choice, the letter of credit can be confirmed by a prime world bank. In order to confirm a letter of credit issued by a foreign bank, a prime bank charges some payment accordingly to the situation. Now the question arises who will pay the charges of prime bank’s confirmation. The seller should keep in mind that he should submit minimum number of documents to the bank while negotiation. The seller should not rely on unknown parties. It is important that accuracy of wording in all documents to be submitted is essential. If the seller comprehends that there is a mistake or problem with the document to be submitted in the bank, he should not let the goods shipped until the letter of credit is amended.
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