Want To Eliminate Risks During Trading? Use Letter Of Credit

There are many challenges usually faced by people during business transactions. When people trade between countries they must ensure that the payment will be received without fail. Usually, this risk will be observed when two unknown people get into business deals. Thus for security letter of credit is used. But there are many companies which still don’t use LC during their trading.  But it is important for all the people who frequently involve in trading to know about this financial instrument.

This is also commonly known as a credit letter which is issued by the bank as a guarantee. It is usually obtained when there is a lack of trust between the two people. It is a popular solution used by many business people when there is a large amount of investment involved especially in international trading.

When should you use a letter of credit?

A credit letter usually reduces the fear between the two people or companies and is considered as the best solution to guarantee payment. Generally, the buyer will be afraid of paying for the goods in advance thinking there can be many risks in it. Sellers, on the other hand, will feel uncomfortable to supply the services or goods thinking about what will happen if they are not paid after delivering it. To avoid this, a legal binding agreement is made during this transaction known as a letter of credit. The issuer of the credit letter is the bank or any other financial institution.

There are different types of LC issued by the financial institute and used for different transaction purposes. Ultimately, by using the credit letter one can ensure the successful transactions between the buyer and the seller. Basically, this is considered as the guarantee made by the buyer to the seller that he/she will pay the amount involved in the trading after receiving the goods or services. With the credit letter issued, the seller will agree to proceed with the trading without any fear.

First of all, it used for payment assurance as mentioned above. Sometimes, certain terms and conditions will be included in this transaction. Where the delivery time will be mentioned in the letter. The seller must ensure that the goods are delivered to the buyer within the mentioned time period. If the buyer doesn’t complete the transaction on time then the seller can take this LC along with other supporting documents to get your payment. As a buyer one can ensure that the quantity and quality of the product are not compromised.

Since it reduces the risk for both the people it is safer to use the letter of credit during any trading. It is worth remembering that the bank will pay the amount only when everything is followed by both buyer and seller as mentioned in the credit letter. The bank will not pay the amount if there are any mistakes in the document like spelling change and a few more. Thus it is better to verify the letter once to ensure that there is no mistake in the document. Next time use this credit letter when you trade with unknown people or companies to reduce any risks involved in the process.