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LoC.9.Thmb.jpg Letter of Credit - a safe and secure payment mode?

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Bikky Khosla | 21 Dec, 2010
Any exporter will perhaps tell you that the most important aspect in the export-import business is finding a payment mode which is secure and safe, and all the more, acceptable to both parties. I strongly believe that it is of utmost importance for each and every exporter to have extensive knowledge of export payment mechanisms and extend credit cautiously. Whenever I'm asked as to which I believe is a relatively cheap and uncomplicated method of payment for both importers and exporters, I invariably go with Letter of Credit.

Although I always advocate Letter of Credit, with the world turning into a digitally connected global village, both the buyer and seller have, however, found various means of transacting commensurate with their needs and comfort.
 
For newbies to the export-import business, I would like to introduce Letter of Credit (also known as L/C, LC, or LOC) as a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. L/Cs are ideally used in international transactions to ensure that payment will be received by the seller.

The reasons why I feel a L/C is a very important tool for export-import transactions is primarily due to the factors involved in international dealings such as distance, different laws in respective countries and absence of face to face interactions between the buyer and seller sitting in two far-flung areas on the globe. It is a fact that the exporter or importer, who are located in different countries, may not know each other. As such many a time the problem of buyer's creditworthiness hampers trade between the two.

At various platforms in the past, I have discussed with several exporters on whether L/Cs are indeed the safest and secure payment mode. They opined that being an exporter, L/Cs amount to guaranteed payment upon presentation of certain documents, thus reducing production risk, for situations when the buyer cancels or changes his/ her order.

Moreover, they felt that it gives them the ability not only to structure the delivery schedule according to their interests, but also in obtaining pre-export finance to finance the production or the purchase of the goods.

Perhaps the single-most advantage as a seller or exporter in using L/C as a payment mode is that the buyer cannot refuse to pay due to any complaints about the goods and the buyer has to raise his/ her complaint or claim separately from the Letter of Credit. This, I think, gives the exporter a significant advantage in resolving such issues related to delayed payments.

However, many importers whom I have met were unanimous on the benefits of L/Cs because the bank acts on behalf of the buyer who is the holder of Letter of Credit by ensuring that the seller or the exporter will not be paid until the bank receives a confirmation that the goods have been shipped.

Having said that, several exporters and importers have been successful too without Letter of Credits. Cash in advance, documentary collection or draft, open account, and other payment mechanisms are also popular amongst the exim community.

Since I always argue for L/Cs as the safest and more secure payment mode, I would definitely like readers to share their views on: 'Do you really think L/C is the safest and secure means of transaction?' or 'Which payment method do you mostly use?' or 'What according to you is the safest means of export-import payment method?'
 
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TDR Related
Vaibhav Jangam. | Mon Oct 15 14:02:22 2018
Who Will Be Pay TDR interest.


Reject by vendor
atul jadhav | Tue Jul 24 07:30:04 2018
what we will do if vendor fail to to payment to us on due date? can we present LC to bank and get the payment from bank? or what is the option


inquiry about coriander seeds and barley
NITIN | Sat Jun 2 17:38:11 2018
i want to import barley and coriander seeds can any one suggest me any genuine company


Import
Amarnath | Fri May 11 12:26:47 2018
I am a new importer from China first i already given advance 30%,can i send balance payment after checking my goods in the fort?

  Re: Import
Vivian Bangera | Thu Sep 20 12:00:16 2018
What do you import? write to me bangera.vivian @ gmail com


L/C Method of Payment
Awais Kareem | Sat Apr 7 14:17:49 2018
Letter of Credit ( L/C ) is safe method of payment for both importer as well as for exporter...,


LETTER OF CREDIT
Mr Tin Win | Sat Apr 7 08:45:01 2018
I really get a piece of new knowledge about this article. However,as an Exporter,I would like to receive the payment as soon as the shipment is aboard the ship.


OTHER THAN L/C
abdul qadir memon | Fri Apr 15 19:42:10 2011
hello guys! my querry is that i am dealing with a company in purchasing iphones.Right now i am just imporing one iphone as a sample. company is located in USA and saying that payment should be made through western union/tt/UPS/fedex and all that.company is saying that the he will ship out after the 30 mins of my payment.kindly advise me what to do?what is the surity that i will definitely get my undefected iphone and how can i secure money in case of not getting iphone.waiting for your reply

  Re: OTHER THAN L/C
Samit Biswas | Sun Jan 13 16:51:03 2013
You propose mode of payment as " CAD " , CASH AGAINST DELIVERY or T/T , telegraphic transfer, which will secure your money and goods as well.


Nature of LC
Viraj V Kulkarni | Thu Mar 10 14:12:21 2011
The LC has to be CONFIRMED & IRREVOCABLE. Any change in the status of the above can make the exporter liable to risk...extreme risk. So, during negotiations, its a must to include these two words in the nature of the LC.


Letter of credit
Umar Ali | Wed Dec 29 22:56:22 2010
I really am disposed to the idea of using LOC for transaction because it had been reliable and somewhat safe,for quite a number of international businesses it had worked for me.


L/C
SAM VERMA | Wed Dec 29 01:25:06 2010
WE FIND THAT MOST BANKS DECLARE THE DOCUMENTS AS DEFECTIVE HOLD OUR PAYMENT.THEY ASK THE PERMISSION FROM THE OPENER OF L/C AND HE REFUSES.WHAT IS THE SOLUTION FOR THIS?

  Re: L/C
kittykumaramangalam@gmail.com | Fri Jun 15 19:41:56 2012
Check your documents properly.don't leave out any thing.then the bank can't give this flimsy excuse and u will get your dues. also if u feel bank is favouring buyer U can report against the bank to ministry of finance of the importing country and also the reserve bank equivalent of that country.


LC
Daniel Mathew | Fri Dec 24 13:45:30 2010
Buyer opens an LC with all good faith on the seller. since both buyer and seller never sees each other all deals go through mandate/mandates.After issuing LC with all the clauses and PB included, on receipt of LC document the seller goes to abank whom he knows and asks for a loan in the tune of 75-80% of the LC amount and he utilises that money for his own purposes and on expiration of the validity of the LC he returns it with PB amount saying a big excuse. For sure the buyer will get back his money. How can we prevent.Please advice


Money Gram vs Letter of Credit
Robin | Fri Dec 24 11:52:58 2010
Dear Godfrey, Some India companies ask that you send your money by way of money gram vs. letter of credit. Why is this and is this a company you can trust? I sent money this way and I'm waiting for my product. Is there anything I can do to make sure I get the product that I ordered? The company has a Trust Stamp. I’ve mailed them a couple of times, but haven’t had a reply. What can I do?

  Re: Money Gram vs Letter of Credit
Alex / BL | Fri Dec 24 19:41:51 2010
If you want to lose your money, Money Gram, Western Union and similar ones is the best option. These companies are not suitable for business transactions but for transfers to relatives, friends etc.


Letter of Credit
Godfrey Rasquinha | Fri Dec 24 03:58:42 2010
A letter of credit is a fairly safe method of payment to a degree provided there are no restrictive clauses attached. Besides it is an expensive method both to the seller and buyer because the bank charges are high and for every amendment there are charges levied by the bank. Thus, the nett proceeds to the seller from the LC may become a lot less than the actual amount of the value of the goods. Besides there are too many complications in presenting docs for payment because the namk insists on every word in the LC document being absolutely correct without which they simply refuse to accept the docs. The cheapest method with least hassles though not very safe is a Bank Draft with documents against acceptance. THis method is used when seller and buyer are known and are confident of payment when goods are received. Though some countries may restrict such modes of payment.All in all the level of comfort that exists between the two parties is the best means for adopting a safe approach acceptable to both parties.Some banks also ask for 100 per cent LC value as deposit before processing an LC.and LC from certain countries is not worth the paper they are written on.


LETTER OF CREDIT
Niranjan Gajendragadkar | Thu Dec 23 08:27:06 2010
After sending the shipping documents to the importers bank how long does it take to receive the payment? Is the payment guaranteed even if the importer refuses to receive the documents from his bank? Pl. enlighten.

  Re: LETTER OF CREDIT
Alex/BL | Thu Dec 23 19:49:45 2010
According to UCP 600 a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. The payment should be guaranteed is there are no discrepancies in the L/C.

  Re: LETTER OF CREDIT
Godfrey Rasquinha | Fri Dec 24 04:09:42 2010
THe time for receiving payment varies from bank to bank. Provided all conditions in the LOC are met word to word only then will the buyers bank pass on the advice for acceptance. This could take from a week to a month.


Frauds with L/Cs
Alex | Wed Dec 22 20:41:25 2010
L/Cs are safer than prepayments or open credit, but fraudsters (both exporters and importers) can successfully use L/Cs to cheat their counterparty. For example, a dishonest seller can ship a container with goods of much lower quality than it was agreed in the contract and he will be paid by the bank if the documents are OK. Scammers also can ship useless things like paperwaste etc. instead of the original goods and they will be paid as well. The simplest way for scammers to get your money is to ship absolutely nothing, forfeit export documents, send them to the bank and if the bank does not recognise the scam, the con artists will get the money and vanish. From the other side, dishonest importers can offer a L/C with build-in discrepancies so the sellers will never be paid as they will not be able to provide the documents required by the L/C. So both exporters and importers should be careful when working with L/Cs.

  Re: Frauds with L/Cs
khushi joshi | Thu May 31 13:30:42 2018
Than which is the safest why of transaction, where both the party not on loss part. please suggest


Reverse of L C for buyer
S JAHAN | Wed Dec 22 16:43:34 2010
The buyer opens L C on good faith upon the suppliers. If the buyer is honest on his part regarding payment and other terms of the negotiation but the question still remains upon the quality guarantee by the exporter.


LC Having risk
Madhu | Wed Dec 22 14:59:24 2010
LC also having risk factor on the payment if we have any discrepancy against LC on the submitted document so the buyer can easily reject the document.


Letter of Credit
R.K.Mahapatra | Wed Dec 22 11:07:54 2010
Letter of Crdit is definiately not the Safest. Of late globally, the use of L/C as payment mode have diminished a lot. The best is always the Advance by Swift Transfer . It is faster & more secure.


Letter of Credit
RCMohan | Wed Dec 22 08:36:48 2010
I agree that a L/C is the most secure and fair instrument while commencing a business transaction between two parties and till sufficient and trust is established.


L/C
Raj Vyas | Wed Dec 22 08:22:22 2010
Yes L/Cs are secure payments provided 1) It is from a recognised Bank. 2) It gets confirmed by the exporters local bank. 3) For exporters' own security, they should ask own banks to advance a small token amount money against the L/C. No bank will if in any doubt. 4) So long as all the stipulations in the L/C are adhered to to the letter. The L/C is good mode of confirmation of payment.


LETTER OF CREDIT
L.CHANDRA MURTHY | Wed Dec 22 08:08:36 2010
The Letter Of credit is A safe Method Of Transaction between two parties.In the Process The Margin money ,and the Interest charged to the L.C Opener is Burdensome.


Letter of Credit - a safe and secure payment mode?
ADIL ISHRAT . PSF JEDDAH | Wed Dec 22 06:28:52 2010
LETTER OF CREDIT is a safe mechanism for both buyer and seller when it is properly read and understood and a clean set of copy is received by the seller, by clean I mean all the discrepancies are to be removed there are several points which one has to read & to understand the meaning of it which may effect the payment and shipment mode plus there are so many types of L/C hence to point which one is the best LC MODE is in accordance to the buyer and seller understanding. but usually it should be irrevocable and confirmed & L/C available at any Bank in your own country or else your bank becomes a mere post office.


L/C
Nilesh Joshi - EXIM Consultant | Wed Dec 22 05:08:08 2010
Better to take advance in full or upto 70 to 75% from buyer & take the shipment cover police from ECGC

  Re: L/C
Hemanth Reddy | Tue Jul 3 17:13:20 2018
Hi sir need some suggestions as I am new to business, my number is 07842346530,name : Hemanth, and my number is same on what's up


conditions in L/C
SANDEEP MUNDRA | Wed Dec 22 04:24:45 2010
By face value L/C looks the safest way of paymnet realisation for an exporter. But imporers have learned the ways to mitigate the compulsion ontheir part by way of various conditions in the L/C. THEY PUT CONDITION IN THE L/C TO USE forwarder OF THEIR CHICE FOR making shipment to them. But some time these forwarder do not give DO for container allotment in time based on the importers advice and shipment time expires. Similarly some time they ask for inspection certificate from from a inspection agency appointed by them. Again this inspection agency issues the Inspaction certificate when they get clearance from the importer, this way they can still controls the export/import paymnet even though it is guarnteed by the Bank.


LC Payment
Srinivas | Wed Dec 22 04:15:34 2010
I agree with LC terms for Imports,however it is advisable to have interest free usance period of minimum 180 days.(interest rates in European countries is nominial)


Theft by L/C
Bud Wood, Ancal, Inc. | Wed Dec 22 03:46:02 2010
Awhile back, we were aware of an L/C that specified a particular means of shipment (a specific airline from a location which that airline did not service). The exporter sent the shipment to a location which the specific airline did service, and the good were on the way. However, the bank did not (could not) release the funds because the impossible conditions were not exactly met. The funds were returned to the buyer who also received the goods. Seems that such fraud can be implemented. Thus, an L/C can be used for fraudulent purposes. I personally consider an L/C in that light. Much better protection is to know the buyer of any goods and be aware of his general reputation.


Letter of Credir
Fiwian | Tue Dec 21 22:31:12 2010
We have found that Letters of Credit have some pitfalls that users should be aware of. Each L/C comes with a set of conditions and these must be met "To The Letter". Users need to closely examine every detail of the L/C to firstly ensure that they can meet the conditions (Certificates of Origin etc.) and then to check spelling of words such as supplier name and address, customer name and address, description of goods etc. Often the address is mispelled or the description of goods is slightly different to your quotation. Banks employ'Readers' to go over every detail of the multiple documents that you must submit to receive payment. Because the bank is required to release the money to you if the documentation is 100% correct and is liable to repay the buyer if documentation is later found to be incorrect the Reader can be extremely pedantic and reject the payment request. Because you are working on a relatively short timeline from shipment to the issuing bank's Acceptance of Documentation, finding that a word on the Insurance Policy, Bill of Lading or Certificate of Origin is wrong or omitted a few days before the deadline can be a real problem. If a document is rejected by the Bank's Reader and you are late with submission the bank will not release the funds without formal instructions from the Buyer. L/C's are the safest option, but before sure to read them carefully and if neccessary request changes prior to acceptance.

  Re: Letter of Credir
Love India | Wed Dec 22 04:56:20 2010
Thanks Fiwian for the comment, your thoughts & others confirms the notion L/C's are best provided everything mentioned in the L/C is clear/acceptable to the seller/exporter. As minor deviation may delay funds. Also as Mr Bud Wood, from Ancal, Inc. referred a L/C with very specific conditions like airline, freighter etc are always difficult as these may lead to delays which may lead to missed deadlines, hence a seller before accepting the same must make sure all the conditions are workable & acceptable. L/C is the safest option but what if a buyer has malicious intention than it becomes very difficult as they may do everything to do a fraud i.e. find one fault or the other & get funds blocked. Knowing a buyer in advance is good option but that limit a company for working with existing buyers only than how business will expand? One of the solution towards this is to go for Credit Report of a buyer before confirming any order, this gives general idea about the buyer their credit worthiness & though may not take away the risk but limit it to some extent. Other thoughts r welcome.


LoC.9.Thmb.jpg Letter of Credit - a safe and secure payment mode?
Manu Morjaria | Tue Dec 21 17:27:31 2010
Letter of Credit is by far the best mode of payment, as long as the terms and conditions of business are clearly defined and all the documents are presented as per the terms of the letter of credit, as agreed by both the exporter and importer and that the banks involved are of international standing, you cannot go wrong.

  Re: LoC.9.Thmb.jpg Letter of Credit - a safe and secure payment mode?
sukhvinder singh | Wed Dec 22 04:38:03 2010
yes its the safest means of payment mode as it secures the money of the exporter.

  Re: Re: LoC.9.Thmb.jpg Letter of Credit - a safe and secure payment mode?
vijay | Wed Dec 22 06:01:26 2010
we r in amritsar punjab. we want to know the procedure of L/C how it will happen. plz tell the whole procedure and mail it on id vijaycomp2006@yahoo.com. we will very thankful to u

  Re: Re: Re: LoC.9.Thmb.jpg Letter of Credit - a safe and secure payment mode?
vivian bangera | Thu Sep 20 12:03:51 2018
Dear Vijay, What do you export import. Kindly write to me on bangera. vivian @ gmail com


 
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