A letter of credit is a document issued by an importer to his bank, which in turn is sent to an exporter’s bank instructing them that a sum of money is to be transferred if certain obligations are met by the exporter, known as the beneficiary. These obligations are usually listed in a separate terms document.
Letters of credit are a common procedure in international trade, which safeguards both parties against fraud and poor service. It is yet another form of financial backing that can give both parties security when completing large financial transactions.
prior to their use, an importer either had to have faith that their goods would arrive and be in the desired condition after making payment, or the exporter had to have faith that the importer would pay them when the goods arrived.
This is now solved as the banks hold the payment in escrow until the agreed terms are met.
For added security you should include a list of terms with your letter of credit that both parties can agree on. If the exporter agrees but does not meet these terms you may be eligible to get some, or all of your money back.
A letter of credit is an instruction, so only needs to include basic details, including the sum to be transferred, and the details of the exporter and their receiving bank.
Sign the letter to give formal authorization for the transaction to take place.
Hayfield Electronics, 9410 Wishing Landing,
Spirit Lake, AZ, 86578-5065, US, (602) 446-2278
Dynamic Electronics, 22 Silicon Industrial,
LETTER OF CREDIT ISSUED BY:
American Banking Council, 2677 Amber Row,
Gladmar, NY, 12546-7874, US, (315) 547-2588
Bank of China, 10 Corporate Square, Beijing
The following is an instruction to grant Dynamic Electronics $12,000, upon the receipt of export documentation. Please find enclosed the full letter of credit terms for this transaction.
Mr. Joe Brown
Rising Sun Import/Export Co.
New York, NY
Dear Tangelo Exports,
We have authorized you, Tangelo Exports, to draw on the account of Rising Sun Import/Export Co. for the sum of $500,000 in the case that the payment for transaction #4564545 has insufficient funds. This letter is valid until collection or until the successful closing of transaction #4564545
We agree that this letter of credit will be honored upon presentation at the applicable time and location. This letter of credit has no expiry date.