Letter of credit is the most important means of payment to complete foreign trade transactions. Letters of credit represents a pledge by the bank opening the credit, upon the request of the importer, to pay the value of the import documents submitted to the bank with which the credit is opened.
This is for the benefit of the exporting client, according to the conditions and regulations contained in the credit. Thus, the credit becomes a guarantee factor for all, the exporter for receiving the value of the goods shipped and for the importer that the goods match his required criteria.
Letters of credit are of two types:
It is a pledge from the bank opening the credit to pay the value of the goods provided that documents of the goods match the terms of the credit. It is also an authorization from the bank opening the credit to the bank receiving the credit to withdraw from its account the value of the goods when the bank receives from beneficiary the ‘carriage documents’ matching the conditions and regulations of the credit.
This is different from the sight credits as the seller allows the importer an indicated period of time that allows him to receive the goods before payment. This is usually done with the importer signing a promissory note for the benefit of the seller with amount of the credit specifying a later date for payment according to the agreement between them. The bank opening the credit becomes automatically responsible for paying the promissory note if the importer fails to pay in the due date.
Necessary documents must be prepared. Most importantly is the allocation of allowed import amount. This is necessary if the regulation of the authorities specify that, as a kind of control over the amount and types of imported goods within the limits of the economic situation.
Review the client request for opening of the credit: (import license, provisional invoice, etc).
The required documents for opening of credit are:
- Specification of the type of credit.
- Specification of the messenger bank in the country of the beneficiary.
- Specification of the type of bondage in the credit.
- Name of importer, it should be complete and clear and also his address.
- Amount of the credit in digits and words, and the currency.
- Marine sales contracts.
- Expiry date of credit.