A letter of credit is an agreement in which a Bank certifies a payment to an exporter against a presentation of a series of documents demanded in a limited period of time, only when the terms and credit conditions have been carried out.
WHY TO USE A LETTER OF CREDIT?
The international market charasteristics makes the international trade more complicated than the local trade , because of the following:
- The period of time which the merchandise is travelling.
- The possible incidents during the trip.
- The custom formalities.
- The foreign trade and currency exchange regulations.
- The different countries legislations.
- Importer and exporter sometimes never meet each other.
- Different languages, currencies, habitudes etc .
The exporter should present to the Bank all the documentation that make clear the sending or the attending of the required merchandise. Against the presentation of the documents that conform the conditions established on the Credit he will get the payment or commitment.
The importer could take away the merchandise with the documents.
Banks never work with merchadises, they always do it with documents.