International trade and finance are a sector that is so lucrative, but at the same time risky. It offers you the chance to expand your business outside your usual market area, allowing you to deal with new international trade partners. However, exporting and importing goods and services across the borders is a venture that requires due diligence. In any case, there is a high chance you will be dealing with unknown merchants and buyers. This is where the importance of a letter of credit comes into play.
A letter of credit is a document issued by a bank on behalf of an importer promising an exporter/supplier payment in case the buyer defaults. This document reduces the risk of non-payment to a supplier for delivered goods. Here are additional reasons why a letter of credit is almost indispensable in international trade.
Proper Terms of Sale and Payment
By drawing a letter of credit, all parties involved have a solid understanding of the terms of sale and payment. Moreover, either party can add their terms and conditions to the agreement before appending their signatures.
Reduces Production Risk
Without a binding agreement, a buyer may cancel or change an order subsequently causing huge losses to the seller. However, a letter of credit changes all this since the exporter/supplier will still receive their payment even if the buyer cancels their order.
Prevents and Resolves Legal Disputes
Since all the terms of sale and payment are already in the document, a letter of credit goes a long way to prevent any legal issues. The document also highlights foreign laws between trading countries, which comes in handy in resolving any disputes that might arise.
Control on Shipment Timing
As an importer, you can decide on the exact date you want the goods to arrive. The bank will only release payment to the supplier once the goods arrive as indicated in the letter of credit.
Demonstration of Solvency
Anything can happen from the time the goods leave the supplier to when they arrive at the buyer’s doorstep. A buyer may file for insolvency or become bankrupt after placing their order. Issuing a letter of credit will protect the supplier from the risk of insolvency filed by a buyer.
Writing a letter of credit is a task best suited for professional trade and finance companies. They can help you draw your letters of credit for any form of international trade. We serve businesses based in Dubai and the entire UAE. Get in touch with us to learn more about our financial services.