Benefits of Letter of Credit (LC) to Exporters

A letter of credit is a contractual agreement used as a credit instrument in international trade to ensure payment for products that are shipped. Since it is a contractual agreement, both the exporter and importer have specific responsibilities to ensure a smooth transaction.

There are various types of letters of credits like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back, etc

• One of the best methods after the advance mode of payment for any business transaction is Letter of Credit (LC) mode, as buyer’s bank guarantees payment to seller through seller’s bank on presentation of required documents as per LC.
• The major advantage of a Letter of Credit to a supplier is minimizing credit risk. In an import and export trade, the geographical distance between the two is very far; hence ascertaining the creditworthiness of buyers is a major threat. In a mode of Letter of credit, such risk can be avoided.
• Buyer can not deny payment by raising dispute on the quality of goods, as the letter of credit terms and conditions are based on documentation. Some of the fraudulent buyers deliberately delay or hold payments by complaining about the quality of goods. In a letter of credit terms of business transactions, rejection of export payment by raising complaints on the quality of goods can not be affected.
• LC provides security to exporter which is another advantage of a letter of credit. Based on such security, the exporter can pre-plan his further business activities to strengthen his business world.
• Any dispute in a transaction can be settled easily, as LC terms and conditions are under the guidelines of uniform customs and practice of documentary credit.
• Against a Letter of Credit, an exporter can avail of pre-shipment finance from banks or other financial institutions. Many banks extend financial assistance with minimum bank interest, a letter of credit is a ‘safe export order’.
• The exporter receives money on time. As you know, ‘finance at right time’ is a prime factor for any business transaction. So if a businessman receives his anticipated amount on time, he can plan his business activities smoothly without wasting time. Assurance to receive money on time is one of the major advantages to supplier/exporter in a Letter of credit terms.

Normally and widely, a confirmed irrevocable LC is opened by buyer and seller which is suitable for both. A ‘confirmed irrevocable letter of credit’ is a ‘confirmed order’ for any exporter is concerned. So the exporter need not worry about the cancellation of his export order or changes in said order. This is an aid to any exporter for his business plans in various levels including financial plans, minimizing production risk, saving time, etc.