WHAT IS LETTER OF CREDIT AND HOW DOES IT WORKS:

1. WHAT IS LETTER OF CREDIT AND HOW DOES IT WORKS

2. When you run a small business, there are various ways to get paid by the customers or business vendors and other organizations. That can be easily done by simple checks, cash, wired transfers, various online payment modes, etc. But if you have a more complex transaction, say with an international client or business house, you will need something legal as an assurance that you will get the money you are to be paid, for the service you provided. One such method is called a Letter Of Credit. A Letter of credit service is a letter from a bank that guarantees that the buyer’s payment to a bank will be paid to the seller, and received within time, for the correct amount. Due to the nature of international dealings or the different laws in each country or the inability of both the parties in knowing each other personally, the use of letters of credit has become a very majorly important aspect of international trade.

3. How does it work? Typically, a letter of credit is a negotiable tool, if the letter of credit is transferrable, the beneficiary can assign any third party or entity, such as corporate parent the right to draw. The issuing bank will pay the beneficiary or the nominated bank by the beneficiary. Elements of a letter of credit:- 1. A payment happening is given by the bank on behalf of a buyer. 2. To pay the seller for a given amount of money. 3. Only when you present certain specified documents, that represent the supply of goods.

4. A letter of credit can be revocable as well as irrevocable. The irrevocable letter of credit is the one that cannot be revoked or altered without the agreement of the issuing bank, the confirming bank, and the beneficiary. A letter of credit is a very complicated transaction than those you might be accustomed to. But it is best at some point in your business. Types of Letter of Credit:- The nature of the letter of credit and how will it work will depend upon the type of letter issued. For eg, if the commercial letter of credit is issued, the bank will directly pay the customer. However, with the standby letter of credit, the buyer is expected to make the payment. But if he is unable to do so, then only the bank will step in and complete the transaction.

5. There are other types of letters of credit as well that include revolving, traveler’s, and confirmed letter of credit. All of which have their own uses. Parties Involved in a Letter of Credit Transaction:- As one might expect, there are few entities or groups that are present in any deal at this big level. Depending upon the kind of deal, different parties are involved. There can be up to 10 distinct groups that can help the transaction to happen smoothly. These include:- 1. The applicant or the buyer in that deal, 2. The beneficiary or the seller in the deal,

6. 3. The issuing bank, 4. The negotiating bank, 5. The intermediary that connects the beneficiary and applicant to help them strike a deal. 6. The freight forwarder, as much big international purchase isn’t that easy. That’s when freight forwarders come in as they handle the logistics and make the international shipping easier. And lastly, legal counsel, that helps in reviewing and drafting the terms and conditions of the letter of credit. It is advised that you use the help of a legit legal counsel such as Greater Birmingham chambers as they can help you so that the language of agreement looks good and does not get rejected, and that it mitigates the risk to the other party.

7. Company Name: BIRMINGHAM CHAMBER OF COMMERCE AND INDUSTRY • Phone Number: 0121 454 6171 • Website :https://translations.greaterbirminghamchambers.com/