What is a Letter of Credit?
What is its purpose? In certain business transactions, the seller needs an assurance that the buyer will provide the money. The buyer would need some kind of tool to convince the seller who wants an assurance. The bank steps in such situations and gives the seller an assurance for the money.

The bank issues a Letter of credit / letter of demand for the seller and guarantees the money to be given by the buyer. The bank will give the money to the seller if the buyer is unable to cough up the money. These letters are very useful in international trade. The money may get delayed to a variety of reasons like shipping delay, bureaucratic complications and various other reasons. The bank acts as a facilitator and pays the seller the money once the goods have been received assignment of debt. It saves a lot of work and time. The bank gets a fee from the buyer for these services rendered.

Charges for the Letter of Credit The Letter of credit may be availed by an exporter or importer by shelling out a percentage of the amount to be guaranteed. The dealer must provide all the details about the transaction and also the delivery and the value of goods perfectly. The details of the seller should also be provided so that the bank can maintain correspondence with them.

These letters usually cost two to four percentage of the amount and it also depends on the term of guarantee of the Letter of credit. TransUnion Canada and Equifax Canada are some of the credit bureaus in Canada that entrusted with maintaining the regulations regarding Letter of credits. They can also be approached online to update any details. Almost all International banks offer this feature and help through their worldwide branches. There are also provisions in these documents for the sellers to draw advance from the amount.

Revolving Letter of Credit Letter of Credits are issued for a particular transaction and is not valid after that transactions. Firms which handle numerous numbers of international transactions would feel the need for a more continuous protection. The Stand-By letter of Credit or Revolving Letter of Credit will give assurance for the sellers over a longer period of time. This facility is mainly utilized by large Importers or Exporters. These letters are used by the seller to get his money from his local branch. The bank will send the money over to the account after receiving the goods.

A Quality checking team may also inspect the goods before the money is transferred. A lot of information about Letters of Credit is available online and most banks have separate departments to handle these transactions. Most international banks may be approached by both sellers and buyers and get the services for a fee depending on the order.

Letter of credit is considered one of the most trusted symbols of guarantee of a financial transaction. It facilitates and speeds up international trade by removing the bottlenecks in the path of trade. Almost all industrialized countries have banks that accept these Letters of Credits.

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