Understanding Letter Of Credit In International Trade

The definition of letter of credit (freepic)

YOGYAKARTA - International trade is becoming increasingly complex with various obstacles such as different time differences, distance, and regulations. To overcome these challenges, business people use letter of credit (L/C).

However, there are still many parties who do not fully understand L/C. Therefore, this article will discuss in detail the meaning, type, and work mechanism of L/C.

Reporting from the International Trade Administration page, letter of credit or credit letter is a contractual commitment from foreign buyer banks to pay after exporters send goods and submit the necessary documentation to exporting banks as evidence.

As a trading financial tool, Credit securities are designed to protect both exporters and importers. They can help you win a business with new clients in overseas markets.

Thus, the letter of credit system means that exporters get payment guarantees while offering reasonable payment requirements to importers.

Credit letters are one of the safest payment instruments available but can take a lot of time and are relatively expensive due to bank costs.

Thus, (L/C) is recommended to be used in high-risk situations, when importer credit is unacceptable or not available, when dealing with new trade relationships or underestablished, or when the payment period is extended.

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The required documents in (L/C) are detailed and prone to errors and discrepancies. To avoid delays in payments and additional costs, the documents required by the Credit Letter must be prepared by trained professionals.

In addition, exporters must consult with their banks before importers apply for Credit Letters. You can ask the following questions:

Before registering, exporters and banks must be satisfied with the credibility of the importer bank. After the Sales Agreement is complete, importers will apply to their banks to open a Credit Letter in the name of the exporter.

The Importer Bank will then compile a Credit Letter using the terms and conditions of the Sales Agreement and send it to the exporter bank. The exporter bank reviews and approves the Credit Letter and sends it to the exporter.

Then the exporter must send the goods in a prescribed manner in a credit letter and submit the necessary documents to their bank. A forwarder can be used to assist in this process.

Furthermore, the Exporter Bank will check documents to ensure compliance with the terms and conditions of the Credit Letter. Every error and discrepancy of documents must be changed and resubmitted. Once approved, the exporter bank sends the appropriate documents to the importer bank.

The importer bank will eventually release payments to the exporter bank. The importer's account was charged and their bank released documents to importers to claim goods and clean customs.

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