For an Importer how safe is Letter of Credit (LOC)

By | October 1, 2019

For an Importer how safe is Letter of Credit (LOC)

Letter of credit is a safe mode of payment commonly for any business especially in international business also.

Letter of credit is been known to be one of the safest payment options for importers in international trade transactions. The reasons why L/C is a very important tool for export-import transactions is primarily due to the factors that are been involved in international dealings such as distance, different laws in respective countries and absence of face to face interactions amongst the buyer and seller sitting in two far-flung areas on the globe.

It is a fact that the exporter or importer, who is located in different countries, may not know each other. As such many a time the problem of buyer’s creditworthiness hampers trade between the two.

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While accepting a Letter of Credit, the supplier guarantees to meet the terms and conditions of letter of credit with documentary proof. This is one of the major advantages of LC to an importer/buyer. This assurance provides security to buyer for future business plan. Since buyer is the holder of Letter of credit, Bank acts on behalf of buyer. Opening bank remits amount only after satisfaction of all terms and conditions of letter of credit with documentary proof. This arrangement protects importer and minimize time, as bank acts on behalf of him.

It reduces the risk of non- performance by the supplier, as the supplier prefers LC than other transactions due to various reasons which protect him than the buyer. This is an advantage for the buyer on fulfillment of meeting commitments on shipments.

Another advantage is that the exporter/seller receives payment of exported goods only after shipment and meeting of all necessary requirements under LC terms and conditions with presentation of documentary proof including evidence of shipment.

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Exporters felt that it gives them the ability not only to structure the delivery schedule according to their interests, but also in obtaining pre- export finance to finance the production or the purchase of the goods. There are cases where several exporters and importers have been successful even without Letter of Credits. Cash in advance, open account, documentary collection or draft and other payment mechanisms are also popular amongst the exim community.

As every coin has two sides, so does Letter of Credit has. It has disadvantages as well but advantages are much higher and so we can definitely say that Letter of Credit is safe for an importer but less as compared to that of the exporter.

Once opened a confirmed and irrevocable letter of credit, the importer/buyer already tied up with the said business credit line and cannot change in between. Due to various reasons, especially on selling price variation, if buyer needs to stop his export order he cannot do so.

Piece of Advice –

  1. Make sure Letter of Credit (LC) gets opened in a prime bank by the exporter.
  2. Exporter should check the authenticity of Letter of Credit.

One thought on “For an Importer how safe is Letter of Credit (LOC)

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