What is it letter of credit?

By Mauro Libi.- When a company decides to make incursion in the international market, it requires of some guarantee that validate their ability to pay and make easy to establish new business relationships. One of them is: letter of credit.

Letter of credit is one of the most reliable payment instruments that exist in the international trade. It’s a payment guarantee issued by a bank, it acts with the consumer name where agrees to pay as soon as they receive from the seller the documentation as a proof of delivery of the goods trough boarding certifications, purchase invoices and so on.

The letter of credit offers confidence even when the client declares itself bankruptcy and cannot honor their agreement, the financial institution will pay whenever the documentation is in order.

Thus, after the parties reach the commercial agreements, the bank, will issue the letter of credit in favor of the seller or exporter in which it undertakes to pay once the agreed conditions. The issuing bank informs the bank of the seller that there is a documentary credit of which his client is a beneficiary.

However, there are several types of letters of credit, namely irrevocable, which are those (the majority) whose modalities established in the agreement cannot be modified without the prior consent of all parties.

The registered letter of credit is the one that expresses the banks authorized to issue, confirm and negotiate the letter of credit. Commercial letters of credit is a local or international purchase transaction.

The letter of credit in sight, by acceptance applies when the payment is immediate against the presentation of the previously agreed documentation. Transferable letters of credit are those in which the exporter transfers all or part of his rights to another party. It is done to avoid the use of own funds to buy the merchandise from the supplier. The standby letter of credit is a bank guarantee used to cover financial obligations for non-payment.

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