Friday, April 29, 2011

Needs of Letter of credit

The goods manufactured in one country can be sold to the market of another country either for consumption or for resale purpose. This purchase sale relationship between two or more countries is the basis feature of foreign trade.

The need for a lc generally arises whenever any two parties ( importer and exporter ) get into a contract to buy and sell something. in any international trading activity as the parties to it reside in two different places. ofter in two different countries, the issue of confidence or credit worthiness of both the parties arises. a party might be big or prestigious even then the other party always will have to think from a worst case scenario. i,e the other party might default and might renege in its obligation. it is to tide over such things that the instrument of lc is invoked.

with the prespective of buyer the need of lc is

Desired quantity and quality of the goods in time.
a managed cash flow, with the bank finance.
an assuring third party.
convenient payment channel
protection against regulatory errors.

with the prespective of seller the need of lc is
timely payments
an assuring third party.
payment to be received on own locations

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