A letter of credit is typically needed when you plan on making a purchase for goods overseas. Primarily, letters of credit are used in importing and exporting. The letter of credit is issued by your bank, and guarantees the seller will be compensated for the goods they are shipping if all of the agreed-upon parameters are met once the shipment is received. If you are satisfied with the condition and terms in a letter of credit, the bank then issues a check to the seller. Follow these steps to create a successful transaction using a letter of credit.
Negotiate your terms with the supplier. Make sure you know ahead of time how much you are going to pay for your goods. Make sure you know the time frame in which you will receive your goods (and any other specific details) to ensure you and the seller are satisfied.
Choose which letter of credit will be best for your transaction. The two most common letters of credit are a revocable and irrevocable. According to the Law offices of Aaron Larson, an irrevocable letter of credit guarantees that your bank will honor the letter of credit in the event all the terms and conditions are met. A revocable letter of credit can be revoked or modified after the bank issues the letter at any time by the issuing bank. The irrevocable letter of credit is the better way to go in that it assures the beneficiary will receive their funds once the terms are met. All parties would have to agree before an irrevocable letter of credit can be revoked or modified.
Apply for the letter of credit with your local bank. In many cases, letters of credit require a credit check. Good credit worthiness is expected, so make sure you know where you stand with your credit rating ahead of time. You can visit Experian.com, TransUnion.com, and Equifax.com to obtain your credit report and score. Typically if you have the funds in your account to cover the cost of the shipment, the process is much easier than applying to the bank for a loan to cover the cost of the product that will be shipped, with no personal funds to back it up.
Allow your supplier to review the letters of credit. The supplier needs to know that the terms and conditions of the letter of credit are agreeable. After all, they are taking the risk of sending goods over first, and getting paid last. Ensuring the supplier has read the letter of credit will give them the confidence of knowing their shipment is protected.
Execute your letter of credit. Once you and your supplier agree upon the terms and conditions, the letter of credit is processed and the supplier is free to ship your goods. Once you receive them and examine them, you will notify the bank, who will then honor the deal by reviewing the terms and conditions and issuing a check to the supplier.
If you are purchasing in bulk, make sure you are getting a discount for buying more units at one time. Also, compare suppliers to ensure you are getting the best deals. Though sometimes it can be challenging, try to get references who have conducted business with your supplier in the same country you are residing.