A letter of credit is amongst the most used trade finance products when trade transactions between a buyers and sellers take place, and this product is provided by banks and financial institutions that have trade finance products in their profile.
A Letter of credit is a document supplied by the buyer’s bank to the seller, after a contract is finalised between the seller and buyer. The seller or exporter then dispatches the goods to a carrier for the exchange of a bill of loading. The seller then goes on to produce the bill of loading to his bank in order to receive the payment. The seller can also collect an advance payment from the bank by producing the document. The seller’s bank then submits the bill of loading to the buyer’s bank who in turn provides it to the buyer. The buyer equipped with the bill will then go to the carrier to collect the delivery of goods dispatched by the seller. It should be noted that in the entire process the buyer does not directly pay the seller and this is what makes the trade so successful.
When it comes to the matter of trust, a seller will always trust the guarantee of a bank more than they trust the seller and this is how trade exchanges are done. A letter of credit is a bank document which guarantees the exporter the payment after the conditions related to the delivery is met by the seller. The bank will also cover the payment in the case of the buyer failing to settle the outstanding amount in full. Therefore, a letter of credit is a great financial instrument which is liberally used in international trade to assure the seller that payment will be made, as the involved parties may be coming from different countries and circumstances.
It is common for buyers and sellers not to know each other when consignments are negotiated. When the issue of payment comes into trade negotiations, the seller would obviously like a guarantee of payment and the buyer would like the guarantee of safe and full delivery of the ordered goods. This is a no win situation, but trade finance products help solve the issues and initiate the smooth transaction between the parties. If you are a trader dealing with an international seller, you will require import finance from banks that sell trade finance products which would facilitate flawless trading. Therefore, the letter of credit is one of the most powerful trade finance products, and private financial institutions operating in the UK offer highly flexible terms to traders when they open an account with them.
