Uses of Letter of Credit

Uses of Letter of Credit :

The need for a letter of credit is a consideration in the course of negotiations between the buyer and seller when the important matter of method of payment is being discussed. Payment can be made in several different ways.

By the buyer remitting cash with his order

By open account whereby the buyer remits payment at an agreed time after receiving the goods

By documentary collection through a bank in which case the buyer pays the collecting bank for account of the seller in exchange for shipping documents which would include, in most cases, the document of title to the goods.

In the aforementioned methods of payment, the seller relies entirely on the willingness and ability of the buyer to effect payment.

When the seller has doubts about the credit-worthiness of the buyer and wishes to ensure prompt payment, the seller can insist that the sales contract provides for payment by irrevocable letter of credit.

Furthermore, if the bank issuing the letter of credit (issuing bank) is unknown to the seller or if the seller is shipping to a foreign country and is uncertain of the issuing bank’s ability to honor its obligation, the seller can, with the approval of the issuing bank, request its own bank — or a bank of international repute such as Scotiabank — to assume the risk of the issuing bank by confirming the letter of credit.

Uses of Letter of Credit