L/C Is it Right for You?
Post 1 of 3
Note that unless you are utilizing a secure Letter of Credit for transaction payments NO bank will help you get your $ back if you are defrauded! They are only vehicles to transfer money not arbitrators! People think that an L/C will protect them but unless you know EXACTLY what you are doing then you can have MAJOR probelms with them.
L/C's are used only for high face valued shipments as the majority of banks wont deal with them if the value is too small. .So anyone that thinks an L/C is the way to go in collecting payments must first contact their bank to determine what they will do for you. As well as a few others have mentioned if you do ultimately use an L/C be certain that it is between two westernized banks that are world reknown. Not the bank of Togo or similar.
L/C's can be a nightmare due to their many terms and conditions. A shipment can be turned away from the buyers side for something as simple like the colour is not what they ordered or the model is not as exactly as decsribed or the packing the product came in is wrong them for example. This is of course after the shipment arrives and inspected as that is why an L/C is used, so the buyer can verify receipt and isnpect (unless that is done prior to shipping) so you are stuck with the load in another country and no buyer.
As well ANY small error on ANY of the related documents will delay the payment and fulfillment of the transaction. Even something as simple as one wrong # in ANY document even if its in an address or phone #!! So unless you are dealing in major face value shipments an L/C is not even a consideration. Get a lawyer to help you if you must use one.
L/C's are used only for high face valued shipments as the majority of banks wont deal with them if the value is too small. .So anyone that thinks an L/C is the way to go in collecting payments must first contact their bank to determine what they will do for you. As well as a few others have mentioned if you do ultimately use an L/C be certain that it is between two westernized banks that are world reknown. Not the bank of Togo or similar.
L/C's can be a nightmare due to their many terms and conditions. A shipment can be turned away from the buyers side for something as simple like the colour is not what they ordered or the model is not as exactly as decsribed or the packing the product came in is wrong them for example. This is of course after the shipment arrives and inspected as that is why an L/C is used, so the buyer can verify receipt and isnpect (unless that is done prior to shipping) so you are stuck with the load in another country and no buyer.
As well ANY small error on ANY of the related documents will delay the payment and fulfillment of the transaction. Even something as simple as one wrong # in ANY document even if its in an address or phone #!! So unless you are dealing in major face value shipments an L/C is not even a consideration. Get a lawyer to help you if you must use one.
10 Mar 2006 13:54
Post 2 of 3
Question? Is L/C same as Bank guarantee? Please advice!! Thank you
14 Mar 2006 22:42
Post 3 of 3
Replying to [maxuout]:
LC VIS-À-VIS BANK/PAYMENT GUARANTEE
Bank Guarantees and LCs are financial instruments often used in inland or international trade when suppliers or vendors do not have established business relationships with their counterparts. The difference between the two credit instruments is the position of the bank relative to the buyer and seller of goods or services. Their characteristics are as explained below.
A letter of credit is a bank’s direct undertaking to the supplier (called the beneficiary) to pay. When a letter of credit is in use, it does not wait for the buyer to default, and for the seller to invoke the undertaking. In contrast, a guarantee is a written contract stating that in the event of the primary party (the buyer) is unable or unwilling to pay its dues to the supplier the bank, as guarantor to the transaction, would pay (the client's debt) to the supplier. In other words, a bank guarantee is an undertaking of a bank on behalf of its customer. But this comes into play only when the principal party (the buyer) has failed to pay its supplier. Essentially, the bank becomes a co-signer for its customer's purchases.
Hence, in a BG the initial claim is still settled primarily against the bank's client, and not the bank itself. Should the client default, then the bank agrees in the bank guarantee to pay for it's client's debts on behalf of its client. This is a type of contingent guarantee. A bank guarantee is more risky for the merchant and less risky for the bank. But this is not the case with a letter of credit.
With a bank guarantee, if a client defaults the bank assumes liability. With a letter of credit, liability rests solely with the issuing bank which then must collect the money from its client. Therefore, the principal character of an LC is that it is a potential claim against the bank, rather than a bank's client. An LC substitutes the bank's credit for its client's. The seller's risk is mitigated from the risk that the buyer will not pay to the risk that the bank will be unable to pay, which is unlikely. A letter of credit is less risky for the merchant, but more risky for a bank, though banks accept full liability in both cases.
[I am also posting this separately as an article - for all.]
LC VIS-À-VIS BANK/PAYMENT GUARANTEE
Bank Guarantees and LCs are financial instruments often used in inland or international trade when suppliers or vendors do not have established business relationships with their counterparts. The difference between the two credit instruments is the position of the bank relative to the buyer and seller of goods or services. Their characteristics are as explained below.
A letter of credit is a bank’s direct undertaking to the supplier (called the beneficiary) to pay. When a letter of credit is in use, it does not wait for the buyer to default, and for the seller to invoke the undertaking. In contrast, a guarantee is a written contract stating that in the event of the primary party (the buyer) is unable or unwilling to pay its dues to the supplier the bank, as guarantor to the transaction, would pay (the client's debt) to the supplier. In other words, a bank guarantee is an undertaking of a bank on behalf of its customer. But this comes into play only when the principal party (the buyer) has failed to pay its supplier. Essentially, the bank becomes a co-signer for its customer's purchases.
Hence, in a BG the initial claim is still settled primarily against the bank's client, and not the bank itself. Should the client default, then the bank agrees in the bank guarantee to pay for it's client's debts on behalf of its client. This is a type of contingent guarantee. A bank guarantee is more risky for the merchant and less risky for the bank. But this is not the case with a letter of credit.
With a bank guarantee, if a client defaults the bank assumes liability. With a letter of credit, liability rests solely with the issuing bank which then must collect the money from its client. Therefore, the principal character of an LC is that it is a potential claim against the bank, rather than a bank's client. An LC substitutes the bank's credit for its client's. The seller's risk is mitigated from the risk that the buyer will not pay to the risk that the bank will be unable to pay, which is unlikely. A letter of credit is less risky for the merchant, but more risky for a bank, though banks accept full liability in both cases.
[I am also posting this separately as an article - for all.]
23 Aug 2007 05:47
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