Letters of Credit represents one of the most significant instruments for international payment in foreign trading – enabling a more secure exchange of goods and protecting the interests of both the buyer and seller. A letter of credit is most frequently used when the buyer and seller are not well acquainted.
Letters of credit represents the irrevocable duty of the issuing bank (the bank which opens the letter of credit by the order of importer) to pay the user of the letter of credit (exporter) for the delivered goods or performed services the amount specified in the documents if documents were presented to the bank in accordance with the previously determined terms and deadlines defined in the text of the letter of credit. Since the letter of credit is a formal instrument, all participants in the letter of credit business have to strictly comply with the terms defined in it.
This financial instrument for payment provides security to both the buyer and seller of the goods or services:
- Benefits for the buyer – obtaining goods as agreed, without the risk to pay something in advance before seeing it.
- Benefits for the seller – safe collection of the delivered goods if it is in line with the instructions and terms specified in the letter of credit.