When running a domestic trade business, how do you deal with payments? You probably use any one of the modes like cash, cheque, demand drafts, or bank transfers. These are the most commonly accepted methods across most countries.
But what about international trade? How do you deal with the payment when the payer is overseas? Most importantly, how do you ensure that he doesn't default on the payment and that everything is smooth and transparent? This is where the role of the Letter of Credit comes in.
It's one of the safe payment methods in exports. It keeps either party safe from any defaults; the goods reach with due inspections, and payment gets released securely without any default.
In this blog, we will understand what an LC is in export and how it works on Tradologie. So, let us get the ball rolling.
What Is an LC?
To understand in simple terms, a letter of credit is a payment guarantee issued by the buyer's bank, which assures that the payment will be released securely to the seller once the agreed conditions in the LC document are met. The agreed conditions are mostly presenting relevant documents pertaining to shipping and transactions. This mechanism ensures peace of mind for both buyers and sellers knowing banking is taking guarantee of the payment.
Why Is an LC Considered the Safest Mode of Payment in Exports?
Letters of Credit are considered as one of the safest modes of payment in international trade. Here’s why:
Bank Guarantee:
In this payment process, the traders are not responsible for the payments, instead their respective banks take the guarantee. This makes it safe because the banks act as a neutral party for the payment facilitations process and ensure there is no discrepancy in the process.
Condition-Based Payments: The payment is released by the buyer's bank to the exporter's bank, only when the conditions specified in the LC terms are fulfilled. This ensures that the due procedures are followed and nothing goes wrong.
Neutral Verification: Document verification is a critical part of international trade. In this process, the entire verification of the documents related to shipping is done by the bank. This keeps the process fair and transparent for both the parties.
Types of Letters of Credit (LCs)
There are several types of LCs and each is suited for the diverse needs of different businesses. Here are some of the most common types:
Revocable LC: Can be modified or cancelled by the buyer without the seller’s consent.
Irrevocable LC: Cannot be changed without agreement from all parties. This is quite commonly used in international trade.
LC at Sight: Payment is made immediately upon document verification.
Usance LC (Deferred Payment): Payment is made at a future date after document approval.
Confirmed LC: A second bank (usually in the seller’s country) guarantees payment if the buyer’s bank fails.
Why Tradologie Uses Irrevocable LC at Sight
So why does Tradologie use irrevocable LC at sight? It's primarily because it is the most secure, fast, and transparent form of payment for bulk international exports. It ensures
Guaranteed Payment: The payment is transferred to the seller instantly post the document verification.
No Modifications: There is no room for unilateral modifications in the commitment to pay, terms and conditions, validity period, and documents required.
Trust and Speed: It encourages confidence in cross-border transactions, especially for new trading partners.
How LC Works on Tradologie
Tradologie as a leading agro-business development tool isn't just confined to providing trade opportunities. It actively supports and facilitates the LC process. Here's how:
Neutral Facilitation: Tradologie acts as a mediator and ensures clear communication and transparency between both parties.
Document Handling: It assists in verifying and sharing the required LC documents smoothly between buyers and sellers.
Linguistic Support: Language is one of the major hurdles in foreign trade and even during the LC process. Tradologie solves it through a dedicated team of foreign language experts.
Transparency and Ease: By supervising the LC process, Tradologie ensures things are done timely and there isn't any delay.
Conclusion:
Finally, in foreign trade, LC is one of the safest modes of payment. In this process, the buyer's bank takes the guarantee of safely releasing the payment. There are many types of LCs, however, Tradologie uses irrevocable LC at sight. Tradologie acts as a mediator and ensures clear communication and transparency between both parties.
