The documentary letter of credit (LC) is one of the most important financial tools for international trade and is an effective solution to eliminate the majority of risks for both the importer and the exporter.
ADVANTAGES
For the Exporter/Seller:
• Upon presentation of the specified documents (in strict conformance) the Buyer/Exporter is guaranteed payment
• Eliminates risk of the buyer canceling the order and therefore reduces production risk
• Makes it easier for the Buyer/Exporter to secure order/production financing-pre-export financing
• Buyer cannot refuse payment by raising a complaint about the goods. Any complaints must be settled between the Buyer and Seller outside of the L/C
For The Importer/Buyer:
• In most cases the Importer/Buyer avoids partial pre-payments or deposits
• Helps reduce the risk of non-performance of the Exporter/Seller. If the Exporter/Seller doesn’t ship the goods they don’t get paid
• Certainty that payment will only be made to the Exporter/Seller upon presentation of documents in strict compliance with the L/C evidencing the shipment of goods
• Documents are received quickly, expediting customs clearance and ultimate delivery
• Makes structuring an advantageous payment schedule easy
• Importer/Buyer will receive timely delivery or the goods because the L/C terms dictate latest acceptable shipment date