The letter of credit, are documents done and well written by commercial banks, to ensure the payment of a certain amount or merchandise. Indicates to the exporter that, having fulfilled the rules and / or conditions of the contradictory event, he is responsible for the Withdrawal of money. In short, it is the letter that is given to a person to benefit from a credit, by the same entity that grants the loan. It can also be a means of international payment.
Its main function is secure long distance purchases and sales, inside or outside a country. It also has the utility of being able to export to other associated countries. As everything is electronically, an electronic invoice can be made.
It is the action in which a bank approves a request according to the client’s instructions, and which must make payment to a third party which would be the beneficiary. As long as the documents are met orders, credit terms and conditions of the intermediary bank.
Irrevocable credit card
This is one of the most used types since it offers guarantee and security to the beneficiary. This is a commitment to immediate payment 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:
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- Standby letter of credit.
- Letter of credit in document.
This type of letter of credit is used mostly for international procedures, and ensure payments when the seller is not in person, likewise when the seller is not willing to give credits to a customer. It is also used when the creditworthiness of a buyer does not match the commercial credit.
Confirmed letter of credit
This is the type of letter of credit that offers more security to the seller. The letter must be confirmed by a bank outside 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. So the seller has the ability to cancel the process if he wishes. That is, in this letter the seller eliminates all risks possible for existing 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 according to the country in which we are:
- It is one of the methods most used payment systems worldwide.
- It allows to perform operations with a high level of reliability.
- The seller collects after having fulfilled the conditions.
- It should have all the relevant information.
- Represents a single payment commitment.
- Non-compliance or illegality may have legal measures.
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Conditions for making a letter of credit
- The bank charges a small fee at the time of carry out this procedure abroad.
- The issuing bank may charge a fee, but this can be negotiable.
- The client must qualify at the issuer’s bank.
Requirements to make a letter of credit
- Own a bank account.
- Complete and subscribe to the bank’s form.
- Have a copy of the country registration
- Have account statements from the last 3 months.
- Detailed investment plan, if possible written in a document with all the clauses.
- Copy of identity card on a white sheet, enlarged.
- Certification of income.
- If the person has a credit card, specify them and write the full number of each one.
- Copy of declaration of the country.
- 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 companies or soloists, it is considered very important, it is used to solve financial problems, it is also used because no one else offers this secure payment method.
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