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Know All You Can About Your Credit Letters

Nov 21, 2007
Knowing the different types of letters of credit can be difficult. In fact, many people today do not even know what a letter of credit is. However, they are used all the time while doing transactions in things like international trade, and loans.

First of all, a letter of credit is basically a paper that is written by the bank to ensure the honesty and integrity of both the buying party and the selling party. The seller promises that the goods he is selling will be presented, and that they meet the terms and conditions of the letter of credit. In return, the bank, who represents the buyer, promises to pay in full the amount owed for the goods.

There are a few guidelines that generally outline the contents of a letter of credit. These guidelines help determine the terms and agreements made by the buyer, the bank, and the seller in the negotiation and trading process.

Here are a few things that generally must be included in a letter of credit:1. Statement that the issuing bank, or the bank that represents the buyer, will pay the amount owed on behalf of the buyer to the beneficiary, or the seller. This insures that the seller will get his money.

2. Statement that the beneficiary will provide documents that represent the goods being sold. This allows banks to get the official papers that show that, after they have paid the amount owed, they now own the goods being sold. That way, the beneficiary cannot take the money, then say that they were never paid.

3. Statement of the certain time limits that both the issuing bank and the beneficiary have to make the payment and provide the papers. That way, the time in which both parties act will be the same.

4. Statement that any documents presented are in correspondence with the letter of credit. If the documents are not in harmony with the agreements on the letter of credit, they are considered illegitimate.

5. There is a certain place stated at which all of
these proceedings will take place. Because of this, the parties can come together and make sure that there are no mistakes made on any side. This allows for fewer mis communications and quicker services.
Basically, there are two types of letters of credit. One is a commercial letter of credit. This is what is most often used in making trade through the bank. It involves the issuing bank, an advising bank, a confirming bank, a buyer, and a beneficiary, or a seller.

The other type is called a standby letter of credit. This is sort of the same thing, but not as significant. It is a promise that the payments will be made and the goods will be presented, but it is more of a reassurance rather than the original letter of credit, like a backup letter of credit, assuring both parties that they will get what they traded for.
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