The letter of credit, are documents made and well drafted by commercial banks, to ensure the payment of a certain amount or merchandise. It indicates to the exporter that, once the rules and/or conditions of the contract made have been met, he is responsible for withdrawing the money. In a few words, it is the letter that is given to a person to benefit from a loan, by the same entity that grants the loan. It can also be an international payment method.
Its main function is to ensure long-distance purchases and sales, within or outside a country. It also has the utility of being able to export to other associated countries. Since everything is electronic, an electronic invoice can be made.
It is the action in which a bank approves a request according to the client’s instructions, and that it must make payment to a third party who would be the beneficiary. As long as the requested documents, terms and credit conditions of the intermediate bank are met.
Irrevocable credit card
This is one of the most used types since it offers guarantee and security to the beneficiary. This is an immediate payment commitment by the bank acting as an intermediary, this document cannot be modified or revoked without the consent of the beneficiary. There are two types of irrevocable credits:
- Letter of credit pending.
- Letter of credit in document.
This type of letter of credit is used mostly for international procedures, and to ensure payments when the seller is not present, as well as when the seller is not willing to give credits to a client. It is also used when a buyer’s creditworthiness does not match commercial credit.
Confirmed letter of credit
This is the type of letter of credit that offers the most security to the seller. The letter must be confirmed by a bank abroad of the buyer, and must be confirmed by a bank within the seller’s country. If the letter is not confirmed within the time frame given, the letter will be returned and the seller will be notified.
The seller has the guarantee of the issuing bank, in addition to the commitment of the confirming bank. Therefore, the seller has the ability to cancel the process if he so wishes. In other words, in this letter the seller eliminates all the possible risks that exist in these procedures. And it helps to make a decision regarding the accounting to see if the beneficiary wants to go ahead or not.
Characteristics of letter of credit
Some of the most important and influential characteristics are the following, remember that some characteristics vary depending on the country in which we find ourselves:
- It is one of the most used payment methods worldwide.
- It allows performing operations with a high level of reliability.
- The seller collects it after fulfilling the conditions.
- You must have all the relevant information.
- Represents a single payment commitment.
- Non-compliance or illegality may have legal measures.
Conditions for making a letter of credit
- The bank charges a small fee at the time of carrying out this procedure abroad.
- The issuing bank may charge a fee, but this may be negotiable.
- The client must qualify at the issuer’s bank.
Requirements to make a letter of credit
- Have a bank account.
- Complete and sign in the bank form.
- Have a copy of the country registration
- Have statements of account of the last 3 months.
- Detailed investment plan, if possible drawn up in a document with all the clauses.
Natural people
- Copy of identity card on a white sheet, enlarged.
- Certification of income.
- If the person has a credit card, specify them and write the complete number of each one.
- Copy of country declaration.
- Copy of marriage (if the person is in one, otherwise it is not necessary).
Finally, it is important to note that letters of credit for many corporate or solo companies are considered very important, they are used to solve financial problems, and they are also used because no one else offers this secure payment method.
