Tata Capital Blog
  • Aspiration
    • Home Loan
    • Business Loan
    • Education Loan
    • Vehicle Loan
  • Lifestyle
    • Personal Loan
    • Travel Loan
    • Wedding Loan
    • Consumer Durable Loan
    • Home Renovation Loan
  • Protection
    • Medical Loan
    • Insurance
  • Finance Essentials
    • Loan Against Property
    • Loan Against Securities
    • Wealth Management
    • Trends
    • Government Regulations
  • Moneyfy
    • Investments
  • Business
    • Equipment Financing
    • Equipment Leasing
    • Working Capital Loans
    • Term Loans
    • Construction Finance
  • COVID-19
    • CORONAVIRUS
    • GOVERNMENT UPDATES
    • WORK FROM HOME
    • LOCKDOWN SOLUTIONS
    • FINANCE SOLUTIONS

Archives

  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • July 2017
  • June 2017
  • March 2017
  • January 2017
  • November 2016

Newsletter

Enter your First Name and Email Address below to subscribe to our newsletter

Categories

  • Business Loan
  • Construction Finance
  • Consumer Durable Loan
  • CORONAVIRUS
  • Education Loan
  • Equipment Financing
  • Equipment Leasing
  • FINANCE SOLUTIONS
  • Government Regulations
  • GOVERNMENT UPDATES
  • Home Loan
  • Home Renovation Loan
  • Insurance
  • Investments
  • Loan Against Property
  • Loan Against Securities
  • LOCKDOWN SOLUTIONS
  • Medical Loan
  • Personal Loan
  • Term Loans
  • Travel Loan
  • Trends
  • Vehicle Loan
  • Wealth Management
  • Wedding Loan
  • WORK FROM HOME
  • Working Capital Loans

Meta

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org
Tata Capital Blog
  • Aspiration
    • Home Loan
    • Business Loan
    • Education Loan
    • Vehicle Loan
  • Lifestyle
    • Personal Loan
    • Travel Loan
    • Wedding Loan
    • Consumer Durable Loan
    • Home Renovation Loan
  • Protection
    • Medical Loan
    • Insurance
  • Finance Essentials
    • Loan Against Property
    • Loan Against Securities
    • Wealth Management
    • Trends
    • Government Regulations
  • Moneyfy
    • Investments
  • Business
    • Equipment Financing
    • Equipment Leasing
    • Working Capital Loans
    • Term Loans
    • Construction Finance
  • COVID-19
    • CORONAVIRUS
    • GOVERNMENT UPDATES
    • WORK FROM HOME
    • LOCKDOWN SOLUTIONS
    • FINANCE SOLUTIONS

Letter of Credit to expand your business beyond geographical boundaries

by tatacapitalblogJanuary 21, 2021 in Term Loans, no comment
Advantages and Disadvantages of Letter of Credit

Introduction

Letter of credit is a secure payment method, mostly utilized by sellers and buyers while importing and exporting.

A contract moderated by banks the letter of credit mitigates the risk of non-payment by buyers after the execution of the trade. The buyer makes the payment to the moderating bank, which withholds the payment until the terms and conditions mentioned in the sales contract are met. The buyer’s bank issues the letter of credit and takes the responsibility of honoring the agreement. When customers or merchants are unknown, a letter of credit allows for a secure and customizable mode of cash transfer, which enables new trade relationships to transact with reduced risk.

A bank usually issues a letter of credit to guarantee payments on behalf of a beneficiary. This beneficiary could be a business or merchant customer of the bank who issues the letter of credit. Banks may also give a letter of credit to prominent citizens to allow people to travel without carrying any cash. The only requirement is that the issuing bank trusts the individual or merchant to make good on their financial obligations.

Additional Read: What is Letter of Credit? All you need to Know about LC

Types of letter of credit

There are several types of letters of credit. Letter of credit can be a direct payment. It can also act as a backup payment option where the failure of the beneficiary to make payment initiates liquidation of the letter of credit. 

A letter of credit is authorized by a foreign bank on behalf of the buyer and is accepted as a guarantee by the seller’s domestic bank. A commercial letter of credit allows payment for goods to a seller upon presentation of satisfactory documentation. A letter of credit is an irrevocable guarantee assuring payment by the issuing bank if the beneficiary meets the contract terms. In contrast, a revocable letter of credit is a payment mode that can be modified or canceled by the bank. 

Letters of credit also cover particular circumstances. Transferable letters of creditallow the beneficiary to transfer the letter of credit and its payment guarantee to someone else. Deferred payment letters of credit stipulate payment after a definite time has expired. A back-to-back letter of credit is where the first letter of credit acts as collateral for the second letter of credit, which the beneficiary issues to the supplier of products or service. A red-clause letter of credit gives funds to the seller before the delivery of products or services. A revolving line of creditallows the beneficiary to receive the specified amount of credit a specified number of times. Simultaneously, the issuing bank restores the credit to the original amount after completion of each transaction.

Additional Read: How do Letter of Credits Work?

Benefits of a Letter of Credit 

Benefits of construction equipment finance

Financial Institutional Banking

When a letter of credit is issued by a bank, the bank bears the weight of creditworthiness in place of the importer. The backing of an established financial institution will enable a seller to do multiple transactions at a time. 

Reduced risk of International Trade

The ability to conduct business and perform transactions with an unknown or newly established business or trade partners globally is made possible through a letter of credit. This feature gives confidence to companies and allows expansion into new geographical locations. The buyer and the seller can arrive at a list of clauses that they agree upon before releasing funds. Additionally, a letter of credit removes the need for up-front cash payments. 

Customizable to suit unique transactions

Letter of credit is customizable. Depending on the trade agreement between the buyer and the seller, the banker can issue an appropriate letter of credit to suit the requirements. The terms of the letter of credit can also be varied based on the trust and agreement between the trading partners. 

However, trading partners must note that attempts to modify the terms of a letter of credit may cause delays and disruptions in the transaction. Also, any discrepancies in the documents or contracts presented by the seller may lead to the issuing bank voiding the letter of credit. There are possibilities of disputes that can arise if the quality of goods delivered differs from what was expected and agreed initially.

Conclusion

Letter of credit is an excellent instrument that securely facilitates international trade. If you’d like to protect your trade from potential risks with a letter of credit, reach out to Tata Capital’s Trade Finance experts for further guidance. 

Share on FacebookShare on Twitter
Previous

Everything You Need to Know about a Term Loan

January 21, 2021
Next

What Are the Documents Required for A Home Construction Loan?

January 22, 2021

Leave a Reply Cancel reply

Related posts

Which Types of Businesses are eligible to get a Term Loan

Which Types of Businesses are eligible to get a Term Loan?

by tatacapitalblogMarch 18, 2021no comment
Business Term loan in 2021

Grow your business with a Term loan in 2021

by tatacapitalblogMarch 10, 2021no comment
Everything You Need to Know About a Term Loan

Everything You Need to Know about a Term Loan

by tatacapitalblogJanuary 21, 2021no comment
Debt Syndication - Pros and Cons

Debt Syndication – Pros and Cons

by tatacapitalblogJanuary 20, 2021no comment

Newsletter

Enter your First Name and Email Address below to subscribe to our newsletter

Recent Posts

  • Complete Guide on How to Register for IELTS Examination
  • Backpacking Essentials for a Trekking Trip to the Hills
  • Are Digital Lending Platforms a Reliable Way to Get Funds for Your Business?
  • An Ultimate Guide for A Solo Female Traveler
  • Amazing Altar Ideas for Having a Cheerful Destination Wedding

Most Popular

  • What are the Steps Taken by the Government to Fight Coronavirus in India?

    What are the Steps Taken by the Government to Fight Coronavirus in India?

    April 3, 2020
  • Electric Scooter vs Petrol Scooter – Which One to Choose?

    Electric Scooter vs Petrol Scooter – Which One to Choose?

    September 2, 2020
  • Top 5 Mileage Bikes of Honda

    Top 5 Mileage Bikes of Honda

    October 17, 2019
  • Top Ten Best Bikes for Your Daily Use

    Top Ten Best Bikes for Your Daily Use

    December 18, 2019
  • Coronavirus: Facts vs Myths

    Coronavirus: Facts vs Myths

    March 12, 2020

© 2017 Rever Magazine Theme. All rights reserved.