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Letter of Credit Payment Method in International Trade - Pros And Cons



There are many ways to pay and get paid in international trade. Some types of payment are more beneficial for the buyer rather the seller or opposite.

Which one is the best for your business?

One of the top 5 most used internationally payment methods is the Letter of Credit Payment Method.

If you haven't seen our post about the Advance Payment method, you can find it here. Also, the Open Payment method is described in more detail here and Documentary Collection Payment Method description is here.


LETTER OF CREDIT (LC) - DOCUMENTARY CREDIT ✉️


A Letter of Credit is one of the most secure international payment methods for the importer and exporter as it involves the assistance of established financial institutions such as banks as an intermediary and a certain level of commitment from both parties.

With a Letter of Credit, payment is made through both the buyer and sellers’ banks.


Upon confirmation of trade terms and conditions, the buyer instructs his bank to pay the agreed-upon sum by both parties to the seller’s bank. The buyer’s bank then sends a Letter of Credit as proof of sufficient and legit funds to the seller’s bank. Payment is only remitted after all stated conditions are met by both parties and shipment has been shipped.

Types of Letters of Credit


A. Revocable & Irrevocable Letter of Credit


A revocable L/C can be amended or cancelled without the consent of the exporter. On the other hand, an irrevocable L/C cannot be cancelled or amended without the consent of all parties including exporter.


B. Sight & Term Letter of Credit


A Sight Letter of Credit is when payment is to be made at the time that documents are presented. On the other hand, when the payment is to be made at a future fixed time from the presentation of documents, this is referred to as a Term Letter of Credit.


C. SWIFT Letter of Credit


The payment should be made to the exporter when they produce the documents to the collecting bank.


D. Back to Back Letter of Credit


Here the exporter uses the LC as collateral to procure another LC for acquiring the raw materials to manufacture the goods. Here, a string of LC's can be arranged.

Source 1, Source 2, Source 3


Source

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