Known by more than one name such as Payment Guarantee Letter, Documentary Credit Letter, a letter of credit is issued by a bank or financial institution that acts like a legal document stating that the buyer will complete the payment to the seller on time. Various terms and conditions are involved in the process. Moreover, if under any circumstances, the buyer is unable to make the full payment or meet with the terms of the contract, then the issuing bank/financial institution is responsible to reimburse the remaining amount to the seller on behalf of the buyer.
Now, a very obvious question that pops up in an individual’s mind is, why is a letter of credit required in the first place? To answer this in very simple words, many types of overseas factors are involved in international trade deals. Factors such as distance, lack of faith between the parties, different sets of laws in the trading countries, and many more make the deals risky for the traders. Hence, a letter of credit in such scenes is a dependable payment method.
Talking about how a letter of credit functions, it begins when there is a requirement of transaction between two parties. One will be requesting for a letter of credit for issuing it to the receiving party. The applicants will be requiring to pay a certain amount of fee to receive the document.
This means that, a trust is recognised in the transaction as the buyer has a legal document that guarantees the collection of the entire amount of money within the deadline. This type of document is transferrable, on the basis of which financial institute it has been obtained. Although this is generally used for international business, letters of credit can also be procured for domestic transactions, depending on various situations.
To have a glance at the most common scenario where letter of credit is needed, suppose two parties who haven’t done any transaction before are on the verge of closing a deal after a discussion and agreement on the terms and conditions, money, delivery date and whatnot. So, the seller asks for a letter of credit from the buyer to make sure that the deal is closed in legal terms.
This type of legal document does a lot of good during transactions of huge amount, as the exchange of money can be done efficiently. As a matter of fact, navigation of the process of transferring money becomes easy, with a written set of instructions available to the buyer. This is highly customizable process, and the deals can be closed on a satisfaction rate much higher than the one completed without the involvement of a letter of credit.
The applicants can also choose from a number of types of letters of credit, based upon their requirements, benefits and other factors taken into consideration. Unique scenarios can be dealt with the applicable type of letter of credit. Most importantly, the applicant can have a peace of mind over huge transactions with the engagement of a letter of credit.
Chandra Credit is a business organization that helps you achieve the dream of growing your business. With experience of more than 20 years, Chandra Credit is a top leading entity which provide every aid needed in setting up and taking the business to new heights.
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