What is L/C (letter of credit) payment? How to use LC in import and export?
L/C as a Letter of credit is a secure payment method that is very secure for both, for seller and buyer. In this case, the exporter and importer agree to use Letter of credit payment and then they will also agree on the conditions of the letter of credit.
Letter or credit is basically an agreement and transaction between two banks, (buyer and seller banks). In this case, Buyers bank will declare to your bank (seller bank), that it will make a certain payment to your bank behalf of the buyer, under specified conditions ( L/C conditions).
Banks will handle and review the documents and one Bank ( buyers bank), will pay to the seller Bank if all LC conditions are met.
In a letter of credit, you as a seller need to tell the buyer, that you want to use LC. Then the buyer will open the LC deposit in his banks. This means, that the buyer will pay the agreed sum of the money on the secure bank deposit or the bank froze that money in buyer account.
You, as a seller ( beneficiary of L/C) will get a notice from your bank about the opened LC for your favor.
For the seller, this means, that the money is available and you don’t need to afraid, that buyer doesn’t have money anymore.
L/C is a method, where the seller will get the deposit against when he met all the LC conditions, presented to the seller’s bank.
At first, the seller needs to give the required docs to his bank, the banker will review the docs and is convinced, that the required docs are presented and all LC conditions are met, then your bank will send the docs to the buyers Bank.
Buyer bank will review docs also, and if all is correct, the buyer side bank will make the payment of the LC sum to your Bank and your bank will pay it out to you during a specified time.
Letter of credit works based on the agreed and confirmed LC terms (contract). In LC contract, most importantly the following aspects are specified and set.
What documents need to be presented to the buyers’ bank by supplier
The timeline of the LC. This means, if supplier cant presents the docs at the right time, then the LC deposit is no longer available, you need take your products back paying the transport costs, also you will get your docs back.
The sum of the LC deposit.
The timeline, during what the buyer’s bank must pay the money out to your bank
There exist different types of letter of credits.
There exist L/C at sight and also LC with the timeline.
Also, there is Revocable and Irrevocable Letter of credit.
Seller and buyer need to agree the best solution.
But as always, this instrument has its own cost, because banks want to make money as well. Usually, the bank will take 5-7% of the total amount of the LC deposit.
Also, the banks always review your planned business and sometimes they may refuse.
Letter of credit is a good idea if you are dealing with expensive goods and your profit margins are high enough.
First, receive the payment, then ship
The very easy solution, but sometimes not acceptable by the buyer. In this Case, the exporter won’t start processing the order, when exporter receives the first initial payment, usually 30%.
Also, the exporter won’t ship the goods, before the balance payment is paid.
In this case, all the risks are on the buyer side, so its understood, why the buyer doesn’t usually accept this. But to make them accept it, we suggest asking them to come and visit you. You can show the buyer the goods ready for shipping, so they can trust you and pay the money out.
If you plan to export to Europe or some other overseas country, then always investigate the potential buyer. Ask the company registration certificate of his company. Google about them, if possible get details of the companies whom they have bought before. Then you can talk to them and ask about this buyer.
Also, make sure their financial reliability, their annual turnover. Make sure how long have they been in the business. Additionally, make sure how professional they are, take any sign of unprofessional as a sign of risk.
So in this article I discussed about what is LC (letter of credit) payment. I hope you understand well. Write your comments below.
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