Letter of credit
With international transactions, you can agree to deliver under a letter of credit (L/C). A letter of credit is a form that provides security for international businesses. On one hand, it offers more certainty that you will be paid for the delivered goods. On the other hand, an L/C also provides advantages to importers, as it offers them more certainty of delivery. Importers will then pay once all the conditions have been fulfilled.
In practice, a letter of credit is used by companies exporting to the Middle East, the Far East and parts of Africa. In most cases, an L/C is also a governmental requirement in these areas. During our Bierens Studio Sessions, Marloes Wittebroek from Elceco explains exactly how a letter of credit works why an L/C is the ideal tool for companies to gain more certainty for their international deliveries.
A letter of credit involves four different parties:
- The exporter of the goods
- The importer of the goods
- The bank in the exporting country (the advising bank)
- The bank in the importers’ country
In addition, you can always hire parties such as Elceco, who can assist in drafting and enforcing letters of credits.
How does a letter of credit work?
When parties decide to make use of a letter of credit, it will be recorded in the commercial contract. In order to do so:
- The importer goes to the bank in his own country and requests to open an L/C. The importer then provides the necessary documents, such as the invoice, a delivery note including the conditions which have to be fulfilled (e.g. the latest delivery date).
- The bank in the importing country then sends the letter of credit to your bank and the L/C to you.
- You will then have to check the terms and conditions mentioned in the letter of credit. If you disagree, then you can inform your customer who will then go back to his bank to make any additional changes.
- Once all parties have agreed on the conditions described in the letter of credit, the delivery of the goods abroad can be planned.
- Once all goods have been delivered according to the agreed condition, then you will receive the payment for the goods delivered.
What does a Letter of Credit cost?
The costs of a letter of credit differ according to each case and situation. In most cases, the bank may charge an additional fee for including both banks in the importing and exporting company. Parties such as Elceco can assist you in drafting a letter of credit with all the conditions that should be included. In the letter of credit, you can also agree on who should pay this additional fee. This could be your company or your client. In most cases, companies agree to bear the costs according to their own countries, but you can agree otherwise.
More information about the Letter of Credit
Would you like more information about the letter of credit or are you curious about what we can do for you? Please do not hesitate to contact us. We will gladly help you.