A letter of credit is the ideal way of securing international trade transactions.
KB offers various types of letters of credit – import, export, etc.
Better security can help buyers negotiate a better price.
About a Documentary Letter of Credit
- The written commitment of the bank to pay a particular amount when the letter of credit terms and conditions defined by the buyer are met
- This commitment to the seller is irrevocable and the bank accepts it at the buyer’s request
Different types of letters of credit:
- Import, export
- Notified, confirmed
- Transferable, revolving standby letter of credit
- One of the most important and elaborate payment instruments used for domestic and international trade
- The buyer is guaranteed that the payment will not be made until the seller meets the terms and conditions defined by the buyer
- The seller is guaranteed that the bank opening the letter of credit will pay if the letter of credit terms and conditions are met
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A Documentary letter of credit is beneficial for both parties:
For the letter of credit applicant (buyer):
- Knowing that the goods are dispatched before payment
- Minimizing the commercial risks by setting letter of credit terms and conditions
- Better price by providing high-quality payment security for a business partner
- Motivation for the seller to deliver within the agreed time and according to the other letter of credit terms and conditions
For the letter of credit beneficiary (seller):
- Guaranteed payment for the goods or services when the letter of credit terms and conditions are met
- Certainty that the amount will be paid when the predefined terms and conditions are met
- Better liquidity – the seller can receive the funds immediately if the receivable is sold to a bank (for transactions with deferred maturity)
- A high-quality letter of credit can be used as a guarantee for suppliers
- For the letter of credit applicant (buyer):
1) purchase contract is signed between the seller and the buyer
2) based on the purchase contract and its terms, the buyer asks its bank to open a letter of credit
3a) the seller sends the goods
3b) the seller gathers documents stipulated by the L/C and sends them via its bank to the buyer’s bank, which check them and, if they meet the terms and conditions, pass them to the customer
4) the buyer’s bank (the issuing bank) pays the letter of credit to the seller and debits the buyer’s bank account
Companies or sole traders – particularly those engaged in foreign trade.