Communications Driven and Group Decision Support System
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Six Sigma and Quality Management
Six Sigma is a business management strategy which aims at improving the quality of processes by minimizing and eventually removing the errors and variations. The concept of Six Sigma was introduced by Motorola in 1986, but was popularized by Jack Welch who incorporated the strategy in his business processes at General Electric. The concept of […]
What Businesses, Groups, and Professionals can do when Faced with Stagnation
What to do when Businesses and Professionals Stagnate Stagnation can happen to anyone. Whether they are businesses, nations, societies, groups, or individuals, the prospect of withering away due to lack of growth or career mobility or opportunities can make even the most resilient of the institutions to atrophy and stagnate. Indeed, the fact that there […]
Should Corporates Implement Affirmative Action as a Means of Ensuring Social Justice?
What is Affirmative Action and does it Help or Hinder the Goals of Social Justice? The United States has a policy of what is known as Affirmative Action on campuses across the country to actualize Social Justice and to empower historically disadvantaged and disaffected communities. Affirmative Action is a term which indicates how members of […]
World Trade Organization: Success or Failure
It has been more than 20 years since the World Trade Organization (WTO) came into existence. However, there is still considerable debate as to whether it has been a success or a failure. The objective of the World Trade Organization (WTO) was to foster efficient economic activity across the globe. This was to be done […]
International trade between an Exporter and Importer would entail multiple transactions in terms of documentation exchange, physical cargo movement as well as settlement of payment which have to be clearly defined and setup in order to ensure smooth business transaction.
Over the years international trade has established various methods and payment mechanisms that are accepted globally by all financial institutions and other related parties.
Normally when the Customer is new to the Exporter, the business transactions are done either based on advance payment or Letter of Credit option. LC is one of the safest mechanisms available for an Exporter to ensure he gets his payment correctly and the importer is also assured of the Exporters adherence to his requirement in terms of quality, quantity, shipping instructions as well as documentation etc.
A letter of Credit is the Buyer’s Banker’s promise to the Bank of the Seller/Exporter that the bank will honor the Invoice presented by the Exporter on due date and make payment, provided that the Seller/Exporter has complied with all the requirements and conditions set by the Importer in the said letter of credit or the Buyer’s Purchase Order and produced documentary evidence to prove compliance, along with the necessary shipment related documentation.
A Letter of Credit is always sent by the Buyer’s bank to the Seller’s Bank or any bank that is becomes an advising bank. Normally the Seller’s bank becomes an advising bank when a normal LC is received and it delivers or advises the buyer regarding the receipt of LC with no responsibility towards it. In case of a Confirmed LC, the Seller’s bank checks out the authentication of the LC from the Buyer’s bank and confirms to stand responsible for negotiating, collecting payment from the Buyer’s bank and making payment to the seller in line with the terms and conditions stipulated in the LC. By adding confirmation to the LC, the Seller’s bank too becomes equally responsible to make payment for the transaction under the LC.
Seller’s Bank in turn will charge and collect service charges from the Seller for the same.
Normally the Letter of Credits issued is irrevocable, which means that no single party can unilaterally make any changes to the LC, unless it is mutually agreeable to both the parties involved. However an LC is said to be revocable if the terms allow any one single party to be able to make changes to the LC unilaterally.
However it is in the interest of the buyer that he should always insist on irrevocable Letter of Credit.
When the LC is opened, stipulating the condition that, on presentation of the negotiable set of shipping document by the seller as per the terms of the LC are made, the buyer’s bank will make payment at sight meaning immediately to the seller’s bank subject to fulfillment of terms and conditions of the LC being fulfilled, the LC is called Sight LC.
If the payment schedule under the said LC stipulates payment at certain future dates after presentation of negotiable set of shipping documents by the Seller and fulfilling the LC terms and conditions, such an LC is termed Future LC or Credit LC. It is quite normal for sellers to extend credit of 30 days to 60 days under LCs. However the shipping documents would have to be presented to the bank immediately so that they documents reach the buyer well ahead in time before the consignment reaches the foreign shores and the buyer is able to clear the consignment and take delivery.
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