Essay Example on Letter of Credit: A Way to Secure Int'l Trade Payments

A letter of credit is a letter written by the buyer to the seller indicating the time payment will be made and the correct amount to be paid. A letter of credit is used within the international trade industry. The buyer's bank must ensure timely and full payment to the seller. If the buyer is unable to, the bank can offer to make the payment or cover the remaining amount after the buyer pays half, and the remaining amount is cover by the bank on behalf of the bank. The letter of credit is typically provided in two to three business days. There are other services offered by the bank for a letter of credit. Also, getting a letter of credit needs some requirements, as discussed below.

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First, to get a letter of credit, you most like to work with the international department of trade and commercial division. Secondly, various documents, the commercial invoice, which is used as proof of value, bill of lading, which is used as a piece of evidence for shipment, packaging list document, which is used to proof the packing, certificate of origin marking the originality, certificate of insurance for quality assurance. The issuing bank is responsible for giving out letters of credit to the beneficiaries (Leng & Hugan, 2018). The message of confidence is essential because the recipient can be assured of safety business internationally, it works like a credit certificate for the buyer, and sellers can access the payment once they fulfill the requirements, each party is free of credit risk for all transactions, and it is a highly customizable method of transacting.

With different banks across the world, there also exist different types of letters of credit offered by those banks. To begin with, the export/import letter of credit whereby the buyers upon making payment, they must name the seller and vice-versa. A transferable letter of credit allows the beneficiary to provide their documents. The beneficiary is not the one who receives the payment. UN-Transferable is where the beneficiary is the recipient, and he/she cannot use the letter of credit to pay anyone, implying the transactions are not transferable to third parties.

The banks offer various services for a letter of credit. If the buyer fails to pay the seller, the bank that issued the letter of credit is responsible for paying the seller because if the seller meets the requirements of the letter for loan, he/she will demand the payment from the bank. The bank, therefore, provides security to the buyer and seller since they are different countries.

The bank also offers the services for processing the businesses' letter of credit once it confirms the assets; it can then approve. The bank also verifies all the documents and matches them with applicant documents when required (Mohammed & Dawd, 2018). In case technical errors occur during the transfer of payments, the bank offers services for solving the problems.

In conclusion, depending on its purpose, various types of credit can be used on different occasions. The interest of the buyer and seller must be thoroughly be analyzed to pick the letter order credit that serves the companies purpose entirely. Most importantly, to note, it is not all banking institutions offer letter of credit services. Still, small banks can refer you to other banks or other financial institutions that can help you. Ultimately, a letter of credit ensures successful transactions between two ends; it serves as a guarantee for payment.

Sending and receiving of funds is more convenient and fast. A letter of credit does business with better innovative and straightforward systems whereby transactions are imposed depending on the types and amount of funds transferred. It is possible to access resources and other digital tools information from the banks that can help grow your business. With the types of business, a letter for credit is designed to meet unique requirements for the user.

References

Mohammed, A. P. D. A. O., & Dawd, R. S. M. (2018). The Bank's commitment to pay the value of Letter of credit in Facing the command when cheating the beneficiary. Basra studies journal, 30(1994-4721), 149-178.

Leng, P., & Hugan, H. A. (2018). Bank Criminal Act: Case of Fraud Using Letter of Credit-Bank as a Victim (Doctoral dissertation, Petra Christian University).