A commercial Documentary Letter of Credit is a form of payment which protects both the buyer and seller during the payment process. It is commonly used as payment while exporting cars to China as it is a way of guaranteeing delivery of the vehicle as well as guaranteeing payment to the seller.
Within the Letters of Credit, there are specific requirements for the documents the seller must provide to its bank to collect payment from the bank of the buyer. Most important is an original bill of lading that proves that the car has been shipped successfully to the destination country.
The greatest benefit of payment by Letter of Credit is for the buyer, who usually can leverage their funds. In many cases, a buyer may only have to deposit 15% of the vehicle purchase price with the bank, which will issue a letter of credit for the full amount.
The main challenge for the seller of the vehicle is that they must finance the vehicle until payment from the bank is received. This can take up to two months in some cases. Also, many banks refuse to handle letter’s of credit which can make the transaction impossible for many exporters.
In summary, Letters of Credit can be a powerful financial tool to assist with International Trade. They do, however, create many challenges for smaller organizations. The Techlantic team is helping these organizations grow their businesses by overcoming these common challenges. Please let us know if you have any questions about Letters of Credit.