Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• LETTERS OF CREDIT
  
  These mechanisms are used by exporters and importers, and usually provided by the importing company's bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. (Also called 'export letters of credit, and 'import letters of credit'.) When an exporter agrees to supply a customer in another country, the exporter needs to know that the goods will be paid for. The common system, which has been in use for many years, is for the customer's bank to issue a 'letter of credit' at the request of the buyer, to the seller. The letter of credit essentially guarantees that the bank will pay the seller's invoice (using the customer's money of course) provided the goods or services are supplied in accordance with the terms stipulated in the letter, which should obviously reflect the agreement between the seller and buyer. This gives the supplier an assurance that their invoice will be paid, beyond any other assurances or contracts made with the customer. Letters of credit are often complex documents that require careful drafting to protect the interests of buyer and seller. The customer's bank charges a fee to issue a letter of credit, and the customer pays this cost. The seller should also approve the wording of the buyer's letter of credit, and often should seek professional advice and guarantees to this effect from their own financial services provider. In short, a letter of credit is a guarantee from the issuing bank's to the seller that if compliant documents are presented by the seller to the buyer's bank, then the buyer's bank will pay the seller the amount due. The 'compliance' of the seller's documentation covers not only the goods or services supplied, but also the timescales involved, method for, format of and place at which the documents are presented. It is common for exporters to experience delays in obtaining payment against letters of credit because they have either failed to understand the terms within the letter of credit, failed to meet the terms, or both. It is important therefore for sellers to understand all aspects of letters of credit and to ensure letters of credit are properly drafted, checked, approved and their conditions met. It is also important for sellers to use appropriate professional services to validate the authenticity of any unknown bank issuing a letter of credit.
  
  Back