Discuss the main advantages of letter of credit or what is the practical importance of letter of credit
A letter of credit has an important place in financing the international trade. It is the safest method of payment. Following are the important advantages for the importer and exporter and for the banks.
ADVANTAGES OF LETTER OF CREDIT :-
1. Legal Document :-
The export letter of credit provides legal right of getting payment of the goods exported in foreign country.
2. Facilities International Trade :-
The letter of credit greatly facilities overseas business and makes the payment of goods easy.
3. Creates Confidence :-
The letter of credit has created confidence in the importer and exporter to rely upon each other.
4. Immediate Payment :-
Showing the shipping documents to the advising bank exporter can get necessary amount. He has not to wait till the money is received from the importer.
5. Pre Shipment Finance :-
Some times exporter can get finance for packing, and even for storing before the shipment.
6. No concern After Payment :-
After receiving the payment, the exporter trans actions come to an end. So he becomes free.
7. Security For Payment :-
An irrevocable confirmed letter of credit provides maximum security to exporter for the payment.
8. Useful For The Importer :-
The letter of credit enables the importer to satisfy the exporters that he will make the payment after the receipt of goods.
9. Facility Of Payment :-
The importer has not to pay the price until he receives the documents. So a sufficient time gap can avail the importer.
10. Source Of Income For Banks :-
Bank charges a reasonable amount for the issuing and confirming the letter of credit.
11. Ownership Of Banks :-
In some countries, until the payment of the due amount, the title and ownership of the goods remains with the banks.
12. Loss Covered :-
The opening bank can cover losses in connection with merchandise by L.C