Letters Of Credit And Their Role In Exports
International trade is a relatively conservative approach that may be used by firms to penetrate export markets or to get supplies at low cost by importing.
The upside of international trade is that a if a business decides to either import or export products or supplies the risks may be minimized. There are many risks to international trade. The advantage is that if a company is not successful in entering new markets it can take suspends operations and continue in the country of origin.
There are several methods by which commercial financing companies make their businesses, the most commonly used are: accounts receivable financing, factoring, letter of credit, bank guarantees, finance working capital, etc.
A letter of credit is one of many methods to provide protection to both parties involved in international transactions.
The letter of credit is often used in international transactions by buyers and sellers outside their borders. The use of this document is essential for imports and exports. The letter of credit is a legal guarantee, because it uses international trade practices to regulate and enable transactions. It is provides not only the legal structure but the formal structure in order for the imports and exports to come to an end to the benefit of both parties.
The Letter of Credit is the promise given by a bank (Issuing Bank), acting on instructions from its customer (payer) to pay certain sum of money to a person or company (Recipient), through one of its correspondents Bank (Notifier), provided that certain requirements are met, such a rule, are the delivery of documents within a stipulated date.
The benefit to the importer (or payer) is the fact that a letter of credit works as a guarantee and the exporter must present it in order to collect payment.
In this context, a letter of credit will provide the legal base and structure for international transactions to be performed successfully.
The letter of credit creates an international triangular relationship where one or more banks serve as mechanisms for payment of the price, while the transfer of goods continues to be a direct relationship between the exporter and importer, but in which the bank says that the importer paid only if the beneficiary presents the documents (certificates of shipment commercial invoices, etc..) demanded in the letter of credit.
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