When Should You Use The Letter Of Credit In Your Business

Nowadays business transactions usually have their own share of challenges particularly when it comes to financial matter. The major challenge which the businessmen face is the lack of mutual lack between the concerned parties during the trading. If you have a big business where you frequently do the international transactions then you would have faced this issue frequently. This is because usually, two unknown people involved in business transactions. Buyers on one side might be afraid of paying the goods or service and finally getting ripped off. Sellers, on the other hand, fear that they might not get the payment after delivering the goods or services. Thus, the perfect solution for this is using the letter of credit.

LOC is considered as the perfect solutions to bring trust between two parties. This refers to the legal agreement which is made between the buyer and the seller that they will guarantee the payment and delivery of goods or services as mentioned in it. The issuer of the credit letter is most the bank or any of the financial institution which provides this guarantee through a document. This is mostly useful for the sellers since they will get the payment for sure even if the buyer couldn’t make the payment on time. But the payment will be guaranteed only if the requirements are delivered to the buyer as mentioned in the document within the span of time.

Why it is recommended to use a letter of credit during a transaction?

The LOC usually reduces the risk involved during the international transactions. Originally, this credit letter was literally a letter written by the buyer’s bank to the seller’s bank providing aguarantee that the payment will be done by the bank if the buyer couldn’t do the payment on time. But nowadays, it is undertaken by the financial institutions and provide a document which says that the payment will be done to the seller on time against the presentation of the letter of credit to the bank only if the terms were strictly followed. The parties involved in the issuance of the credit letter are:

. Applicant – Usually, this refers to the buyer or the importer who makes the payment.
. Beneficiary – It refers to the seller or the exporter who sells the goods or services and expects the payment.
. Issuer – This indicates the financial institution which issues the LOCand acts as the backbone for the secured transaction and smooth completion of the trading.
. Advising bank – It is the beneficiary’s bank which will receive the payment on behalf of the seller.

There are different types of letter of credit available which varies according to the transaction types. This is mostly used so that all the business people can use it to improve their growth. But it is essential to verify the details in the document once while getting it to avoid any risks in getting the payment in the future. Thus the credit letter benefits both the buyer and the seller, hence it is always recommended to use it if you are choosing the international transactions.