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Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. The beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable.
Revocability
All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a 3rd party. The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary.
2. The beneficiary can enjoy the advantage of mitigating the issuing banks country risk by requiring that a bank in its own country confirm the letter of credit. That bank then takes on the country and commercial risk of the issuing bank and protects the beneficiary.
3. The beneficiary minimizes collection time as the letter of credit accelerates payment of the receivables. 4. The beneficiarys foreign exchange risk is eliminated with a letter of credit issued in the currency of the beneficiarys country.
Disadvantages of Letter of Credit. 1.Since all the parties involved in Letter of Credit deal with the documents and not with the goods, the risk of Beneficiary not shipping goods as mentioned in the LC is still persists. 2.The Letter of Credit as a payment method is costlier than other methods of payment such as Open Account or Collection
3.The Beneficiarys documents must comply with the terms and conditions of the Letter of Credit for Issuing Bank to make the payment. 4.The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the Issuing Banks country and Foreign Exchange Risk in case of Usage Letter of Credits
: Bill of lading, lorry or truck rec Railway receipt, CMC receipt, Delive
: Just like the name says the LC can be the agreement of the
beneficiary.
Irrevocable letter of credit
Importer
Exporter
Great!
Documentary Credits like a Letter of Credit or L/C is the most preferred form of payment for goods in international trade as it solves issues of mutual mistrust by using banks as arbiters.
Common problems associated with the letters of credit process are listed below.
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The shipment schedule cannot be met weather extremes. mechanical or IT breakdown border crossing delayed The stipulations concerning freight costs are unacceptable; The price becomes too low due to exchange rates fluctuations; The quantity of product ordered is not the expected amount; The description of product is either insufficient or too detailed; which effects the customs classification and the tariff applied The stipulated documents are difficult or impossible to obtain." export permits. permit for hazardous materials. permission for the truck to cross some int'l border
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