writing-1149962_1920The letter of credit is a crucial aspect of international transactions. International trade involves some risks: for an exporter, the risk of buyers failing to pay for goods, while for an importer the risk of paying without receiving any goods. In addition, because of the distances and different law systems involved, it may be hard to resolve any dispute. The Letter of Credit (L/C) becomes indispensable since it ensures that payment is received, making imports and exports easier and more reliable. It is basically a promise to pay given by an Issuing Bank, acting on instructions from its customer, generally a buyer, to make a payment to a Recipient, through one of its correspondents acting as Notifier, provided that certain requirements, specified in the terms of a letter of credit, are met. In different words, a buyer’s bank guarantees payment to the seller’s bank on presentation of required documents as per L/C. Nowadays, in modern business world, most commercial L/Cs are governed by a set of international rules, developed by the International Chamber of Commerce; these rules are referred to as Uniform Customs and Practice for Documentary Credits.

An exporter, thanks to a L/C, can obtain a long list of advantages. The major threat relies on the creditworthiness of the buyer, L/C will minimize such risk. It will also eliminate the risk of denied payment due to disputes on quality of goods, as often happens, dishonest buyers intentionally delay or hold payments by complaining on quality of goods and this will not be feasible with a L/C if all the documentary requirements are satisfied. Moreover, the export order will become safe providing the security that buyers cannot cancel or amend orders, besides, a L/C will also give an assurance to receive money in full and on time allowing the seller to save time, reducing financial and production risks, and better plan shipments and business activity.

As mentioned above, a L/C provides benefits to both parties involved in an international transaction. Importers, thanks to a L/C, make sure they receive cargo as per delivery schedule requested and according to all the remainder requirements specified in the documentary credit. Furthermore, by a letter of credit, importers can demonstrate their solvency and avoid or reduce payments in advance.

It is important to be aware that using a L/C involves additional costs. Banks charge for providing such services, thus it is sensible to weigh up the costs against the security benefits. Despite their benefits and importance, they can also sometimes result in expensive delays, bureaucracy and unexpected costs. A L/C, in fact, is sometimes deliberately issued with mistakes or with clauses that are different from the contract of sale, thus reducing its efficiency as a secured payment mechanism.

In conclusion, a L/C gives the opportunity to exporters and importers to widen their businesses by dealing with not only politically stable countries and trading partners with a good reputation, but also finding new partners especially in emerging countries. Importers can show they are credit-worthy and exporters can demonstrate they are able to produce and ship goods on time, thus it is possible to state that L/Cs enable new partners to know each other and to do business effectively, thereby they provide the basis for a long and stable commercial relationship.