Import Export Secrets Blog

There are several means of payment for international trade
transactions. One of the most widely used and accepted is
the Letter of Credit…

Letters of Credit

You will, at some point in your Import/Export career, need
to use letters of credit in most import/export transactions.
A letter of credit is therefore one of the most important
aspects of this business.

A letter of credit is the written promise of a bank, on
behalf of a buyer, to pay a seller provided the seller
complies with the terms and conditions set forth in it.

Those terms and conditions revolve around two issues:
1 Documents that show title to goods by the seller.
2 Payment.

Banks act as intermediaries to collect payment from the buyer
in exchange for the transfer of documents that enable the
holder to take possession of the goods.

Documentary credits provide a level of protection and security
to both buyers and sellers engaged in international trade.
The buyer is assured that payment will be released to the
seller only after the bank has received the title documents
called for in the credit, and the seller is assure that they
will receive payment.

Letters of credit can be revocable (can be cancelled by the
buyer), or irrevocable (can’t be cancelled by the buyer),
confirmed (a second bank, in addition to the buyer’s bank,
guarantees the payment) or unconfirmed (payment is guaranteed
only by the issuing bank).

Types of Letters of Credit

There are many types of letters of credit. Each type contains
features designed to meet the different needs of the buyers,
sellers, and banks involved. Some types of letters of
credit are: revolving credits, red clause credits,
transferable credits, and back-to-back credits.

The Role of Banks

It is important to note that a fundamental principle of
letters of credit is that banks deal in documents, not in
goods. Banks are responsible only for issues relating to
documents and the specific wording of the documents as
opposed to issues relating to the goods themselves.

Therefore, banks are not concerned if a shipment conforms
with the documents, only that the documents conform to the
wording of the letter of credit.

Although letters of credit provide good protection, they do
have their limitations. They do not ensure that the goods
actually shipped are as ordered, nor do they prevent other
disagreements or complaints arising from the trade. But the
more you learn about letters of credit, the less likely
these limitations are to hinder your business.

See the Insiders Guide to Import/Export for more details.

There are various other means of payment including:
Telegraph Transfer and PayPal.