Letters of Credit

The term letters of credit usually refers to both exporters and importers.  This term has been used for many years, and means that an exporter needs to know their goods will be paid for upon receipt.  A letter of credit can be obtained by the customer’s bank.  This letter is then given to the seller.  This means the buyer is the party who usually requests the letters of credit since they want to assure the seller or exporter that the goods are going to be paid for once they reach their final destination.   It is essentially a contract of good faith, showing that the buyer has been loyal to other exporters in the past, agreeing to and paying for the goods once they receive them on the other side.  It helps to assure everything will run smoothly and there will not be any collection issues or other problems once the transaction is completed.

Letters of credit are helpful to both buyer and seller because they help to establish a sense of trust, which can become the building blocks for future business transactions.  The letter is basically a form of insurance that promises the buyer has good credit with other exporters and will not leave them “hanging” when the goods arrive.  The letter can show things like accounts in good standing with other sellers, as well as a basic overview of their business credit, so that the buyer feels confident in exporting their merchandise to them.  Letters of credit can help to make all parties feel confident in their transaction, and can help to ensure that neither party will end up losing money from time, transportation, and manufacturing.  Most banks issue letters of credit and can assist those requesting them in making sure they contain all of the information needed, as well as offer validation and an official signature and date.