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Secrets of International Trading © copyright
Letters of Credit The foreign importer, perhaps having changed its mind or its financial circumstances, may not pay for the goods when the documents are presented or when the time draft, even though previously accepted, falls due for payment. Consequently, to be on the safe side, the exporter may require a bank letter of credit, as well as a draft. A letter of credit is a document issued by a bank at the request of the importer. Whereby the bank agrees to accept and/or pay drafts drawn upon it by the exporter so long as the conditions set out in the letter of credit (e.g., latest shipping date, no partial shipments etc.) are complied with.
Revocable versus Irrevocable
Common sense would dictate, it is the
irrevocable letter of credit
that is in everyday use. Such a document, once issued, cannot be revoked or amended without the agreement of all the parties involved, the bank, exporter as well as importer. |
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Confirmed versus Unconfirmed Sometimes a foreign bank, for one reason or another, will not honor its own financial commitment or perhaps due to, the sudden imposition or alteration of foreign exchange controls in the importing country may make payment impossible, even though the foreign bank wishes to honor its commitment. Consequently, the exporter should, if it is unsure about the foreign bank's reliability or the foreign exchange situation - insist on not just an irrevocable letter of credit but one that is confirmed as well. A confirmed, irrevocable letter of credit, means that the exporter's bank undertakes to pay the importer, should the foreign bank fail to do so. The exporter's bank may be reluctant to confirm a letter of credit if it has any doubt as to the trustworthiness of the foreign bank or the possibility that foreign exchange controls may prevent the conversion of the importer's currency into the desired foreign currency. In such a case, it may refuse confirmation unless the full amount of the funds is transferred to it right away from the foreign bank. Whatever the case, the exporter's bank will charge for such a service. By stipulation that the foreign importer arranges for a confirmed irrevocable letter of credit, the exporter knows that if he ships the goods as agreed, he will have the foreign bank's assurance of payment as well as the assurance of his own bank.
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