Letter of Credit Basics: Risks in Letters of Credit

Each international trade transaction carries a risk, lower or higher.

Some trade relationships might have been established for a long period of time between importers and exporters, whom are located in safe countries with sound financial backgrounds.

In such a scenario, we can talk about two professional partners, working for a win-win situation, both of them understanding its roles and responsibilities in order to complete the transaction in a good manner.

Concluding these kinds of transactions financially would not be a difficult task.

Now, I want you to think just an opposite scenario. Potential trade is about to initiate between an importer and exporter, whom has no enough knowledge about the counter party. Even more, at least one party is located in a politically unstable country.

What do  you think. Which payment method should be chosen to satisfy both parties under such extreme conditions?

Do you think that you can find a risk free payment method that you can rely on regardless of the surrounding conditions?

Above, I have tried to illustrate two different conditions effecting the payment selection decisions in international trade.

On this post, I will try to explain the risks associated with international payment methods in general.

Specifically, I will emphasize the risks in letters of credit for different parties perspectives.

Letter of Credit Basics: L/C Transaction

How does a letter of credit work? How to use a letter of credit in import and export businesses?

So far, I have published two articles under "Letter of Credit Basics" series at advancedontrade.com. 

First article was published with the following title: "Letter of Credit Basics: Definition and Types". Second article's title was "Letter of Credit Basics: Parties to Letters of Credit".

This is the 3rd article of "Letter of Credit Basics" series and it will be focused on letter of credit transaction process.

With the help of an illustration and detailed explanations, letter of credit transaction will be covered from beginning to end.

After reading this article, you should be able to answer questions such as:

• Who is initiating the letter of credit issuance process? Importer or exporter?
• Which party advices the credit to the exporter?
• Which party / parties must pay letter of credit amount to the beneficiary against a complying presentation?

Letter of Credit Basics: Parties to Letters of Credit

Letter of credit is a payment method in international trade. It is usually shortened as L/C or DLC. DLC means Documentary Letter of Credit or Documentary Credit. 

As of yesterday, I have started to write down a new series of articles regarding letters of credit. The 1st article was about the definition and types of letters of credit.  

Today, on this article, I will try to introduce you the parties to a simple letter of credit transaction. Each L/C party will be presented briefly and its role will be explained with the help of the graphic images. 

In a typical letter of credit transaction, one should expect to see following parties: applicant, beneficiary, issuing bank, confirming bank, nominated bank and reimbursing bank.

Let us start understanding these parties along with their roles and responsibilities one by one below.

Letter of Credit Basics: Definition and Types

Letter of credit is a payment method used in international trade transactions.

The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.

Due to this complex structure, many international trade personnel have facing difficulties in letter of credit transactions.

Starting with today's post, I will be writing articles regarding different aspects of letters of credit. Hoping that my posts will be helping you out in your daily work.

The first article not only explains letter of credit definition but also defines letters of credit types.

What is Import Customs Clearance?

When it comes to customs clearance, many people think of customs operations occur only at the importing stage.

But this widespread belief does not reflect the reality, because at least two different customs clearance have to be done in a single foreign trade transaction.

First customs clearance takes place at the exporting stage, which is called export customs clearance and second customs clearance takes place during the importing stage, which is also known as import customs clearance.

On my previous article, I have explained export customs clearance.

Today I want to make clarifications regarding import customs clearance operations.