Why is letter of credit the commonest method of payment in international trade? Essay
Why is letter of credit the commonest method of payment in international trade?
How to pay or be paid becomes a crucial choice as soon as you begin doing business across borders. When you do business internationally, there are ways of paying that you might never hear about when doing business in just one country. There are a lot of method of payment in intertraditional trade but the commonest method is letter of credit. Letters of credit are the most common method of payment in international trade as they provide protection to both parties involved in the transaction.
They are issued by the international department of a chartered bank, usually that of the exporter and state all the terms and conditions that the exporter must meet before collecting the specified amount. If the conditions are met, the bank promises to pay the exporter. Letters of credit specify the documentation needed for customs clearance as well as details of any other terms associated with the sale (e. g. , packaging changes or translated literature). A letter of credit may be revocable or irrevocable.
Irrevocable letters of credit are preferable because they cannot be canceled unilaterally and therefore greatly reduce the risk of non-payment. The exporter can also ask the bank that will be transferring the funds, usually the exporter’s own bank, to confirm the letter of credit. This means that the bank guarantees payment upon the fulfillment of the terms of the agreement by the exporter. This confirmation provides additional assurance that the exporter will be paid. EX2: Introduce:
With the development of international trade, many methods of payment in foreign trade appeared, such as open account, the letter of credit, bill of collection and advantage payment. Among them, L/C is the commonest way. It is because L/C has many advantages which other methods do not. Body: -Paragraph 1: L/C is one of the safest methods of payment. oIt guarantees payment upon presentation of the documents specified in the terms of credit. oThe exporter can reduce the risk of non-payment for delivered goods. -Paragraph 2: the document credit gives the importer some advantages.
oThe importer has not to pay in full for goods until shipment has been made and the documents are presented in good order. oL/C can help the importer significantly reduce the risk connected with the seller not meeting its obligation. -Paragraph 3: On the other hands, L/C has its own disadvantages. oThe goods shipped may not conform to the order of the importer. oThe buyer will waste some money and times for the compliant and solving that problem. oThe exporter has to strict compliant the condition of L/C. Unless that, the bank will not issue payment. 2. What are the advantages and disadvantages of letter of credit? EX1