How complicated is letter of credit (LC)?

Question

Hey people,

Just wondering how complicating will it be using the letter of credit (LC) actually? I am thinking of settling my payment with this China company using letter of credit and this is my first time dealing with letter of credit. All I know by using letter of credit is when I have receive my goods only will the supplier receive the payment. So, there will not be a risk that the supplier not delivering my goods after they received my payment. Any advice will be great. Thanks a lot people!

Answer 1

It's usually easy. If you have the money in your bank account, just ask your bank for a letter of guarantee. They will write the letter for you, and freeze the funds in your account to ensure they are available when it's time to pay. It's similar if you get a loan or have a line of credit. You'll need to provide the bank/lender with the company information for which you want the LC or guarantee.

Answer 2

A letter of credit, often abbreviated as anLC or L/C, (the acronym LOC may also be used but this is more typically used to mean a Line of Credit) and also referred to as a documentary credit, often abbreviated as DC or D/C,documentary letter of credit, or simply as credit (in UCP 600 which is effective as from 1st July 2007) is a document issued mostly by a financial institution which provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the credit. This means that once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to pay irrespective of any instructions from the applicant to the contrary. In other words, the obligation to pay is shifted from the applicant to the LC issuing bank or confirming bank, if any. Non-banks can also issue LC. The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Since nowadays almost all letters of credit are irrevocable, (i.e. cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any). However, the applicant is not a party to the letter of credit. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques.

Answer 3

Wrong. The shipper gets paid when they meet the terms of the letter of credit, so these terms better be crafted carefully. They usually get paid when they supply proof that they have shipped your goods, not when you receive them.

Example of a problem: they ship the goods and send you the bill of lading but no insurance receipt. The ship sinks. They still get paid. Did you think that they were responsible for buying insurance? They're not, unless it says so in the letter of credit. (If you had required insurance in the letter and they didn't provide it, then they don't get paid.)