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Cost, Pricing, and Payment - Standard letters of credit

5 important questions on Cost, Pricing, and Payment - Standard letters of credit

What is the Commercial or documentary Letters of Credit ?

This represents a guarantee for both the buyer and the seller. If the use of a Letter of Credit is agreed to by both the supplier and the customer, the customer applies to its bank The customers bank has to approve the customer's credit and then issues the Letter of Credit that describes the documents required and the payment terms.

The Letter of Credit is then sent to the supplier s bank of choice, called the advising bank. The advising bank checks to be sure that the Letter of Credit is authentic and delivers it to the seller.

What is Standby Letter of Credit ?

The customer opens a Standby Letter of Credit. The seller would draw under a Standby Letter of Credit only if the customer fails to pay outstanding invoices within a specified period of time. less expensive alternative in some cases.

What means Collections/Bills of Exchange ?

similar to Letters of Credit but the supplier's bank does not bear responsibility for assuring payment.
The bank acts as an agent to forward the documents to the customer s bank and make presentation for payment.
less protection to the supplier but there are several advantages.

What advantages are involved with Collections/Bills of Exchange ?

supplier or its bank can retain title and control of the merchandise until the buyer has paid.
Collections are far less likely to have errors in the documents than Letters of Credit.
Both banks work for the supplier.
The customers failure to pay does not affect the supplier s legal rights pursue collection or the supplier s credit insurance.

What is the disadvantage of letters of credit?

Letters of Credit can be extremely expensive to obtain while this may be considered part of the 'cost of doing business eventually someone pays that cost.