International Letters of Credit
Tips & Advice to help you make your decision on International Letters of Credit
Although in use for centuries, the application of international letters of credit (LCs) is certain to be on the rise given today's expanding global economy. Utilized in a variety of large commercial transactions, they serve primarily as the monetary replacement in an international exchange of goods or services.
An issuing bank, of which the purchaser is a client, issues payment on behalf of the purchaser, while the advising bank operates on behalf of the receiver (the seller) who provided the goods or services purchased, and receives the money.
The international letter of credit specifies the documentation required at time of payment to substantiate that the goods were shipped, or that the service was provided. This documentation is provided by the beneficiary via the advising bank. The issuing bank bears no responsibility for verifying that the actual merchandise reached the buyer, they are only concerned that the documentation presented meets the requirements as set forth in the LC.
Once a letter of credit is issued, it cannot be altered or annulled, except with the explicit agreement of all parties involved, with the entire process following the code set by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits.
For further information on international letters of credit and whether your business can benefit from their use, be sure to reference Business.com.
Using International Letters of Credit
Get your export business moving using a commonly accepted financial toolBy Greg Brown The paperwork surrounding an international letter of credit is daunting. But the idea is remarkably simple: The money is separate from the deal, and exchanged via you and your foreign partner's respective banks. If all terms in the letter are met (generally, that the goods have been shipped, although the jargon quickly overwhelms), the money moves. It's all about cutting risk.
Start at your local bank
Medium-sized U.S. banks in recent years have jumped into international trade finance and letters of credit. They can be more responsive, particularly for an existing customer.
Try:
Regions, Wells Fargo, and CapitalOne are in this business. Smaller state banks are too, particularly those near busy trade ports in New York, California or Florida.
Find a qualified partner
Ocean bills of lading are not the same as invoices, which are not the same as packing slips (six copies, please!). The regulations surrounding international letters of credit - essentially diplomatic agreements devised by the International Chamber of Commerce more than seven decades ago - can be complex, although the actual letter is simplicity itself.
Try:
The United States Council for International Business trade group has endorsed Quality Letters of Credit. The company claims to process $2 billion in letters annually.
Consider a courier
Another key trend in trade has been the rise of couriers from postal workers in nice uniforms to cutting-edge supply-chain providers.
Try:
FedEx, UPS and DHL, and other courier outfits with global reach, can cover many small business needs when it comes to exporting.
Find a provider who is a good fit
Any number of companies sell software that generates export documents. Some offer outsourcing and still others can write software that links your export business right into your company's back office. It all depends on how heavy your export business becomes.
Try:
CustomsInfo is a pay database of documentation requirements, while Unz & Co. and ExportDoc Worldwide software generates paperwork on the fly. TradeBeam offers end-to-end service, including letters of credit. Bolero is the next step up, neutral and paperless, and is endorsed by big banks and industrial shippers. ABN AMRO, a global bank, has a trade platform called Maxtrad. Finally, database companies like SAP, Oracle and SSAGlobal offer heavy-duty solutions.
Protect yourself
Even a letter of credit isn't enough if the risk is bigger than you'd like, but the opportunity is bigger still. Export insurance can make a big difference at relatively little cost.
Try:
The U.S. Export-Import Bank has a database of lenders who work in international trade.
- Experience can vary, so get references from current customers before signing on with a bank or document-handling company.
- Some financial experts consider letters of credit to be sometimes-useful antiques. Instead, couriers can offer foreign-country collect-on-delivery and similar services that can save you from the red tape.
- Make no assumptions about speed. If you are counting on payment in a very short time frame, better to arrange working capital just in case.
- Letters of credit come in two flavors: Revocable and irrevocable. The latter means neither party can alter the contract under any circumstances. Make sure you get the type of instrument that's right for your deal.
International Bank for your international business needs.
International Letters Of Credit
ICC Books USA: Guide to Incoterms Incoterms 2010 and more
Get A Letter of Credit. Financial services - import/export
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