What is a Letter of Credit (L/C)?

A Letter of Credit is a bank-issued document confirming that the buyer will pay the correct amount of money to a seller on time. You may think of it as a cash advance or a contract.

The L/C is an international trade facilitator as it demonstrates the buyer's intention and ability to pay – this document mitigates the risk for sellers. Furthermore, it accelerates cross-border trade.

How can you pay for orders via L/C?

When a supplier submits the documents stating the goods has been shipped to the buyer as stated in the L/C, the bank either pay him immediately, called sight L/C, or on a future date, called usance L/C. The buyer then pays him for the shipped goods on an agreed date. If the buyer fails to make payments, the bank is obligated to settle the account.

Who should pay with a Letter of Credit (L/C)?

Letters of Credit are useful to both suppliers and buyers within B2B cross-border transactions. Buyers find the Letter of Credit as an effective way to build their relationship with suppliers and enhance their credibility. They also enjoy faster delivery time and less paperwork, and the ability to finance larger orders.

For those who wish to gain more control over cash flow and require bank guarantees, Letters of Credit are also useful.

Why pay with a Letter of Credit (L/C)?

Letters of credit benefit both the buyer and the supplier.

Reduces the risks

A letter of credit ensures that the buyers will certainly receive goods according to the contract listed in L/C because both your and suppliers banks are involved. Enjoy the peace of mind knowing your goods are safe.

Build Supplier Trust

A letter of credit ensures that the suppliers will certainly receive the payment for shipped goods, thus reducing production risk. L/C mitigates any risk associated with non-payment possibilities that could arise at the buyer's end.

Faster Delivery Times

With a Letter of Credit in place, the supplier can ship goods right away with no need for collateral since they know they will be paid upon delivery upon submission of required documents. This ultimately speeds up order processing and shipment time.

Buy Now, Pay Later

With a letter of credit, buyers can purchase larger orders and can pay later at the agreed date via usance L/C. This gives suppliers a bank guarantee, which is an asset they can often use to obtain funding directly from their bank.

Manage Cash Flows

Having an LC ensure sellers receive payment on time, which can go a long way in helping them manage their cash flow. For buyers, ordering now and delaying payments until a later date so they can choose how and when to use their money.

How Does a Letter of Credit Work?

A Letter of credit is basically a contract between four parties: the buyer, the seller, the issuing bank, the advising bank.

To get acquainted with the letter of credit procedure, let's look at the step-by-step movement of the money and documents:

  • A buyer asks the supplier if they can by way of a letter of credit. The seller and buyer, then, agree on payment and delivery terms and sign a contract.
  • The buyer applies to issue a Letter of Credit from his home country's issuing bank.
  • The issuing bank will issue the Letter of Credit to the seller's designated bank, also known as the advising bank, confirming that the payment will be made once the required documents will be submitted and approved. This includes both clean documents per L/C clauses and documents with discrepancies that the buyer has accepted.
  • The advising bank will verify the L/C and notify the Seller that the letter of credit has been received.
  • Upon receiving the L/C, the seller ships the goods to the buyer.
  • The seller provide the required documents to its advising bank proving that the L/C order has been fulfilled.
  • The advising bank checks the documents and forwards them to the buyer's issuing bank.
  • The issuing bank makes the payment (for sight L/C), or acceptance (for usance L/C), to the negotiating bank after verifying and approving the documents.
  • The documents are then released to the buyer once he pays (for sigh L/C), or promises to pay later (for usance L/C) to the issuing bank. In case of any discrepancy in the documents, the buyer's issuing bank will refuse to pay, until the buyer makes a further decision.

How Does OneAgrix Help in this Process?

At OneAgrix, we know that the letter of credit is very important in cross-border trade and must be handled with care.

For a letter of credit, the buyer will issue the letter of credit from their issuing bank to the seller's advising bank. OneAgrix will help the seller register the letter of credit information on the OneAgrix digital platform.

Moreover, Oneagrix will help with the handling of the documents review and presentation of such documents to the negotiating bank. OneAgrix, together with the licensed financial institutions, could provide L/C financing to its sellers. The deal information will be kept confidential.

For more information or inquiries, drop an email at info@oneagrix.com