LETTER OF CREDIT

Letter of credit Singapore

Letter of Credit (or LC) is a commonly used trade finance instrument used to ensure that the payment of goods and services will be fulfilled between a buyer and a seller. Both parties use an intermediary, namely a bank or financier, to issue a Letter of Credit and legally guarantee that the goods or services received will be paid for.

Importers and exporters normally require intermediaries such as banks or alternative financiers to guarantee payment and the delivery of goods. Cash advances or trade credits on open accounts are usually used after the buyer and seller develop a trusted relationship. Therefore, trade finance structures are used to support these relationships.

How do You Use a Letter of Credit?

One of the parties, usually the importer, will contact a bank to serve as an intermediary and to guarantee to the seller that the goods will be paid for according to the agreement. All parties involved need to agree to the terms and sign the contract. This lowers the risk of doing business significantly, as Letters of Credit are legally binding documents that are acknowledged by 175 countries worldwide.

Who should use a Letter of Credit?

Letters of Credit are useful to any business that trades in large volumes, both domestically, and cross-border. They are important to ensure the cash flow of a company and lowers the risk of default due to non-payment from the end customer.

Additionally, a LC can benefit companies that structure their business around trading or services.

Overseas Business

International traders or wholesale producers of goods are the primary users of Letters of Credit. These types of company need to be certain that they will not suffer losses from selling to overseas buyers that they are unfamiliar with.

In the unfortunate case that the recipient of the goods is unwilling or unable to pay the seller, the LC is activated, and under the terms of the agreement, the bank will be obliged to cover the missing payment. After the intermediary completes the payment, the bank will deal with the buyer according to the domestic law of the country where the buyer is located.

What Are The Benefits Of Using A Letter of Credit?

Risk and trust are one of the major challenges when it comes to trade, be that domestic or international. The specificity and legal weight of Letters of Credit are a big advantage, given that they are accepted and acknowledged by 175 countries, reduce the risk of doing business overseas, and provide transparent collaboration between unknown parties.

Finally, Letters of Credit provide better clarity on the transaction, as all of the goods or services supplied would be defined in detail. This provides additional comfort to the buyer as well as removing the possibility that the descriptions of the goods ordered are vastly different from what arrives.

Key advantages:

  • Avoids potential disputes overseas
  • Some form of guarantee to a seller / supplier that they will get paid
  • Flexibility and variability across different types of LCs
  • Secure payment method endorsed by most major markets
  • Risk of non-payment is taken by the banks rather than the buyer
  • Often required by national border / exchange control agencies

 

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You’ll enjoy :
  1. Trust, because payment will only be made if
    – All stipulated documents are received in good order
    – All the terms and conditions of the LC are complied with
  2. Financing, which can be arranged for bills under LC
  3. Reduced risk for both commercial and foreign exchange

Did You Know?

  • A company can have a few trade lines and make your business more flexible and efficiency.
  • One line, multiple products for both import and export use.
  • Now the Credit lines of up to 10 times the amount of security provided.
  • It allows you to use Letter of Credit, Trust Receipt, Shipping Guarantee, Bills Purchase and Invoice Financing etc to meet your trading and business requirements needs.
  • Up to 120days and Interest chargeable only when you use the line extended to your company.
  • Absolutely hassle-free application process.

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