Letters of credit
Advantages and disadvantages of letters of credit?
Before using letters of credit you should consider their advantages and disadvantages.
Advantages of letters of credit
The main advantage of using a letter of credit is that it can give security to both the seller and the buyer.
Advantages for sellers
- By asking for an appropriate letter of credit a seller is reassured that providing they present documents in order and within an agreed timeframe they will receive their money in full and on time
- A letter of credit is one of the most secure methods of payment for exporters as long as they meet all the terms and conditions
- The risk of non-payment is transferred from the seller to the bank (or banks)
Advantages for buyers
- When a buyer uses a letter of credit they get a guarantee that the seller will honour their side of the deal and provide documentary proof of this
Disadvantages of letters of credit
- It's important to be aware of the additional costs involved in using a letter of credit. Banks make charges for providing them, so it's sensible to weigh up the costs against the security benefits.
- If you're an exporter you should be aware that you'll only receive payment if you keep to the strict terms of the letter of credit. You'll need to give documentary proof that you have supplied exactly what you contracted to supply.
- Using a letter of credit can sometimes cause delays and other administrative problems.