Letter of Credit
A Letter of Credit can be a vital tool when you're dealing with international payments. In essence a Letter of Credit furnish both the importer and the supplier with a degree of security which may not be enjoyed otherwise.
What is a Letter of Credit?
A Letter of Credit is basically a bank guarantee for payment of goods being supplied. In this context this could be:
- You buy goods from abroad and the seller requirs a letter of credit from you, or
- You sell goods abroad and require a letter of credit from your purchaser.
How common is a Letter of Credit?
Letters of Credit are commonly requested by the supplier of the goods in advance of delivery to protect them from default on payments. It is an internationally accepted method of settling trade payments with rules and guidelines in place which is governed by the International Chamber of Commerce (ICC).
How does a Letter of Credit work?
There are 5 basic steps to a Letter of Credit:
- The buyer and seller agree the terms of trade (price, specification, shipping etc).
- Buyer applies for a Letter of Credit from the issuing bank (their bank).
- The issuing bank sends the Letter of Credit to the supplier's bank.
- The supplier sends the goods to importer.
- Assuming all the agreed terms are met, the issuing bank pays the supplier.
Key facts on Letters of Credit
- It offers a secure form of payment.
- Letters of Credit are available in all major currencies.
- Once issued, a Letter of Credit it is irrevocable. This means it cannot be amended or cancelled without the agreement of all parties to the Letter of Credit.
- Buyers cannot cancel or alter the terms and conditions without the sellers agreement.
- It can restore your working capital as soon as possible after shipment of goods.
- The payment security offered allows you to safely develop new business relationships and opportunities.
- It is issued on a 'sight' or 'term' basis: 'Sight' means drafts are drawn for immediate payment. 'Term' means drafts are drawn on a term payment basis - e.g. 30 days after sight, 90 days from bill of lading.
How can Incompass assist you with Letters of Credit?
As one of South Africa's premier forex companies, it is within our role to advise you on the best way to transact your foreign payments. Our associations with major banking institutions mean we take away the stress, negotiations and shopping around for you.
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