What is LC? Letter of Credit (L/C) is a letter of credit issued by the bank, at the request of the importer, promising to the seller to pay a certain amount, within a certain period of time. , if the seller presents a valid set of documents, in accordance with the provisions of the LC.
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In short, LC is a letter of commitment from the bank to pay the exporter. Contracting partners are often based in different countries, so there is still a lack of trust between the parties. The documentary credit method helps the two parties feel secure about their interests.
Through this method, the importer applies international payment standards (currently: UCP 600 – Uniform Documentary Credits Rules and Practices issued by the International Chamber of Commerce).
You can see sample L/C as shown below.
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Types of L/C
Here are some of the more common types of Letters of Credit:
Revocable L/C Irrevocable L/C Confirmed Letter of Credit Transferable L/C Letter of Credit Back to Back L/C Revolving Letter of Credit Standby Letter of Credit Reciprocal L/C Conditional Letter of Credit Red Clause L/C
Main content of L/C
Number, location, date of opening L/C L/C type Name and address of related parties: L/C requestor, beneficiary, banks…Amount, currency Validity period, payment term money, and delivery term Delivery terms: terms of delivery facility, place of delivery… Contents of goods: name, quantity, weight, packaging… Documents the beneficiary must present: exchange bills, commercial invoices, bills of lading, insurance documents, certificates of origin… Commitment of the bank to open the letter of creditOther contents
Process of L/C
Advantages and disadvantages of LC
Benefits for the exporter:– The bank will make the payment as specified in the credit regardless of whether the buyer wants to pay.– Delays in the delivery of documents are minimized.– When the documents are transferred to the issuing bank, the payment will be made immediately or on a specified date (if it is a deferred L/C).– Customer can request a discount of the L/C to have the money used in advance. for the preparation of contract performance
Benefits for the importer:– Only when the goods are actually delivered will the importer have to pay.– The importer can rest assured that the exporter will have to do all that is specified in L. /C to ensure that the exporter will be paid (otherwise the exporter will lose money).
Benefits for the Bank:– Collecting service fees (L/C opening fee, money transfer fee, household payment fee…) – generally having money.– Expanding international trade relations.– Disadvantages The biggest of this form of payment is the very meticulous payment process, the machines, the parties are very careful in preparing and checking the documents. Just a small mistake in making and checking documents is also a cause to refuse payment. For the Issuing Bank, errors in checking documents also lead to huge consequences.
The choice of any method in international payment activities is also a very important issue for business people, especially international business. Currently, Vietnamese commercial banks implement most popular forms of payment. However, stemming from objective reality as well as the advantages and disadvantages of each method, the documentary credit payment method is currently a popular payment method at Vietnamese commercial banks.