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What is a letter of credit

What is a Letter of Credit

Credit - a transaction for which the buyer givesan indication of the bank to pay the seller from his account the agreed sum of money in a certain time period after the provision of the documents indicated by the contract.

The concept and essence of the letter of credit

When letters of credit can be divided into three groupsparticipants. It applicants - payers of the letter of credit, the beneficiary - recipient of payment by letter of credit, the bank itself, which acts as the guarantor of the transaction between the parties. This form of payment is practiced in foreign and domestic trade.
As a practical working of credit? For example, the seller and buyer have entered into a supply agreement, but work on a prepaid basis due to the high risk of non-delivery or non-payment of the goods they are not ready. Then the buyer goes to the bank to open a letter of credit in the amount of the contract. Specifies the conditions under which the money should be written off at the expense of the seller. This, for example, the provision of shipping documents (waybill, invoice). The less trust between companies, the wider the list of documents. In a statement on the letter of credit spells out the name of the beneficiary, the type of credit, opening date and other parameters.
The seller received a notification received by letter of credit provided by the bank under the contract document and receives the money for the goods.
Such services are provided by banks is not free. for opening the letter of credit fee is paid by the buyer, it varies depending on the bank.
Advantages of letters of creditIt consists in the payment of additional safeguards for the provider, controlling the conditions of delivery by banks. Disadvantages - in complex workflows and high commissions banks.

Classification Credits

Today distinguish between many types of letters of credit, among which the payer can choose the best.
In Russia, the letters of credit are divided into the following groups:
- Revocable and irrevocable - today all letters of credit are bezotzyvnymi-
- Proven and nepodtverzhdennye-
- Covered (deposited) and guaranteed.
As confirmed letter of credit to another bank(Other than the Issuer) is required to pay the full amount to the beneficiary upon presentation of documents that match the terms of the letter of credit, regardless of the transfer of money to him. If the obligation of another bank is missing, the letter of credit - unconfirmed.
To cover the letter of credit, the entire amount is transferred to the bank account of the beneficiary's bank cover the expense of the payer or credit.
Most of the letters of credit is uncovered. According to him the bank did not transfer money to the beneficiary's account, and gives him the opportunity to write off the required amount from its correspondent account.
There are other types of letters of credit. According to a letter of credit with red clause supplier can receive an advance before the date of the shipping documents. The revolving credit is used for regular deliveries and has the ability to automatically resume.
Transferable letter of credit allows you to make transfers to other parts of the letter of credit beneficiaries.

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