Advantages Of Letter Of Credit

Advantages Of Letter Of Credit

The advantages of letter of credit for both buyer and seller makes it one of most payment method used for transaction. Here’s why. 

Originally, this type of document is simply a written letter by the buyer’s bank (also known as issuing bank) to the seller/seller’s bank (known as advising bank), promising a payment guarantee in case the buyer’s defaulted and unable to pay.

advantages of letter of credit
LC provides similar security between buyer and supplier at the same time. Making it one of the preferred choice for payment. Source: Letter of Credit

Indeed, you can say that letter of credit is similar to an insurance, providing a peace of mind for the seller in selling their goods. In a way, letter of credit means ‘a promise to pay’, and the advantages are applicable to both buyer and seller.

What Are The Advantages Of Letter Of Credit?

Advantages To Seller/Supplier/Exporter

As mentioned before, the advantages of letter of credit means the seller have the promise from buyer and the buyer’s bank that the purchased goods will be paid according to the agreement made in advance.

This also reduces production risk if the buyer decides to cancel or changes the order made, which are unlikely given the complications, hence only if the changes are deemed necessary then the buyer will do so.

The seller also have the chance to get financing between the shipment and payment officially made.

And because if the nature of the document itself, the seller will be able to determine the date for the payment, for a smooth business operation.

Advantages To Buyer/Importer

Letter of credit also provide security for the buyer as well. Where the payment will only be made if the supplier sends the required documents according to what have been stipulated in the document.

The buyer can also able to control the time period for shipping of the goods, as well as to reduce or avoid any pre-payment (usually happens for first orders).

By a letter of credit, the buyer demonstrates his solvency to the seller and third parties involved, for guarantee and establishing trust.

Source: Letter of Credit

Are There Any Downside Of Letter Of Credit?

The only downside is the cost to create the document itself – which actually is not that much, compared to the benefits and security that a letter of credit provides for your business.

Conclusion

At Venturette Solutions, LC is one of the top payment term of choice we have seen from both supplier and buyer’s alike, with Telegraphic Transfer comes second, likely due to the efficiency and security that are suitable to their business model at this moment.

Further reading: Types of payment used in import/export business.

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Reference: 1,2

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