The primary advantage of using a letter of credit is that it provides security to both the seller and the buyer. There are pro’s and con’s.
Some of the advantages for a seller:
- under the appropriate letter of credit a seller is reassured that providing they present the documents in the format and place or time designated ion the contract for sale they will receive their money in full and at the time stipulated.
- 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, as it is issued usually by a bank.
- the burden and risk of non-payment is transferred from the buyer to the bank.
Some of the advantages for a buyer:
- when a buyer uses a letter of credit they be assured that the seller will honour their side of the contract of sale and provide documentary proof that they have done so before the buyer (or its bank) is required to make payment.
Some of the disadvantages of letters of credit
- there are additional costs involved in using a letter of credit as a bank will charge a fee for providing them;
- the letter of credit issuing bank will likely want security from the buyer or cash cover, before it commits to taking on the liability conveyed by the letter of credit;
- if you are a seller you should be aware that you will only receive payment if you meet the terms and conditions of the letter of credit. Furthermore, you will be required to provide documentary proof that you have supplied exactly what you have contracted to supply; and
- the use of a letter of credit can be administratively cumbersome and delay the conclusion of a contract of sale.
Our expert team at Francis Wilks & Jones are here to help you with any issues you might have in relation to advantages and disadvantages of letters of credit. Our knowledge on letters of credit is very broad and we have dealt with many enquiries on the advantages and disadvantages of letters of credit for both sellers and buyers. Our practical experience and legal expertise means that we can assist whatever the nature of your letters of credit enquiry.