Mantissa's quick guide to "Letters of Credit"

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Get Paid for Exporting
With a letter of credit, the exporter will be assured of payment once he hands over to his advising bank - provided he has met all the necessary conditions e.g. shipping date, no partial shipment etc. as specified in the letter of credit.

Consider whether your foreign currency should be sold forward to the exporter's bank - particularly if credit terms are being given and payment is due weeks or months in the future.

Documentation for Export
The exporter should find out what types of documents are required for an export transaction, how many copies of each, and from where they can be obtained.

Insurance for Exporting
Consideration should also be given to the currency in which payment is to be made and if there is any risk of an exchange loss that could wipe out the expected profit.  

The exporter knows that the branch of its bank in the foreign country, or its correspondent bank, will not hand over the shipping documents (including the bill of lading that transfers ownership of the goods to the foreign importer).

Unless the importer has made payment or, in the case of credit sales, accepted a draft for future payment. Export insurance is also available to protect the exporter from financial loss, if the foreign buyer fails to pay.

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Export Payment, Financing, and Documentation
For new client, the exporter should insist on payment by sight draft drawn against an irrevocable letter of credit - which is a written commitment by the foreign buyer's bank that it will pay for the goods.

Any doubts about the foreign buyer's bank or the exchange situation, the exporter may insist that the letter of credit (L.C.) to be confirmed by his own bank. Credit terms to the foreign buyer - ranging up to 180 days may still be provided with a L.C.

Documentary Drafts
A draft is a written document prepared by the exporter and the foreign buyer agrees to pay a given sum of money, for value received at sight (i.e., immediately) or at a stipulated future date, known as a time draft.

One important reason for using a draft is that, should the importer fail to pay for the goods purchased, the exporter, or more usually the foreign bank involved, can sue for the money on the basis of the documentary draft alone.  It does not have to prove the terms of the export sales contract.

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