Trade transactions must be handled with care. This is to ensure that neither party disappoints the other. One of the best ways to see this through is by using a letter of credit. They can be used to facilitate payment of funds and allow for smoother trading operations. There are different types of letter of credit (LC) issued by banks. Each type has a specific purpose in trade. In this article, we will be focusing on the letter of credit import export. Depending on the user, an LC can become either an export LC or an import LC. A buyer would term the LC as an import letter of credit whereas the seller would term it as an export letter of credit. They are both used in the domestic and international markets. Below are some of the differences between these two LCs.
An import LC is issued by the buyer’s (importer’s) bank on their behalf, stating that the seller is the beneficiary. This means that the bank will pay the seller (exporter) if the buyer cannot pay the agreed amount within the agreed period of time. An export LC, on the other hand, is an import letter of credit that is received by the exporter’s bank. Once an import LC has been accepted by the exporter’s bank, it automatically becomes an export LC. The exporter then needs to agree to the terms and also submit any documents attached to or mentioned in the import LC before he can be paid.
An import LC lowers the risk of fraud and also improves the importer’s credibility. This is because the importer would’ve gone through a thorough clearance process and have a good financial history. For the exporter, it ensures that he gets paid for his goods and services.
The import LC document is legally binding. This means that the terms and conditions cannot be changed unless all the parties involved agree and sign off on the change(s) made. An export LC is also legally binding; however, it is designed to suit the needs of the exporter. Hence, the terms and conditions are flexible. They can always be changed by the exporter (only), as long as the terms are fair.
An import LC gives the buyer better bargaining power. Any buyer with an import LC will be respected and trusted, even more, giving them a better chance at bargaining and getting a good deal. It does not give the exporter any extra bargaining power since, ultimately, he has the final say.
An export LC gives the exporter a better cash flow. Once he submits all the necessary documents, he can get paid even before the shipment reaches the importer. An import LC does not exactly improve the cash flow of the buyer, but it can serve as a good source of funds during an emergency.