Letter of Credit

Understand what is a Letter of Credit and how it is used in International Trade Activities.

Importance of Letter of Credit

Companies and laypeople often do not have the capital they need to fund projects or make large purchases on their own. They have to turn to credit in order to secure the financing they need. Letters of credit are letters that banks issue to verify the credit a business or person has. They are useful because they tell sellers that the bank will back the buyer in the event the buyer can't pay on his own.

Purpose

The primary purpose of a letter of credit is to guarantee payment. Although the conditions of a letter of credit may vary based on your situation and the bank's regulations, letters of credit essentially let you capitalize on the bank's credit instead of relying on your own. The seller knows that if you don't come through with funds, the bank will. This promise to pay is vital for establishing new business relationships.

Letter of Credit in International Trade

In general, people use letters of credit for international trade. This is because people may be less familiar with companies, sellers and banks the farther away they are. It also is harder for effective communication to take place in international trade, although technology greatly is improving communication difficulties. Letters of credit also are useful for any domestic transactions where the buyer and seller have not worked with each other previously.

Advantages of Letter of credit
·The seller has the obligation of buyer's bank's to pay for the shipped goods;
·Reducing the production risk, if the buyer cancels or changes his order
·The opportunity to get financing in the period between the shipment of the goods and receipt of payment (especially, in case of deferred payment).
·The seller is able to calculate the payment date for the goods.
·The buyer will not be able to refuse to pay due to a complaint about the goods
·The bank will pay the seller for the goods, on condition that the latter presents to the bank the determined documents in line with the terms of the letter of credit;
·The buyer can control the time period for shipping of the goods;
·By a letter of credit, the buyer demonstrates his solvency;
·In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to the buyer.
·Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

What are the requirements?
•Basic trade concepts
•Knowledge of English language
•Passion to learn

What am I going to get from this course?
•Over 15 lectures and 1.5 hours of content!
•Understand when a Letter of credit is used?
•To get knowledge of how the process works.
•To understand the importance of Letter of Credit in International trade.

What is the target audience?
•Finance Students
•Professionals
•Anyone working in Import-Export business
•Anyone who wishes to learn about Letter of Credit