Letters of credit are documents from a bank that guarantee a buyer’s payment to a seller will be received on time and fro the correct amount. So, how can businesses use this service, and what are the benefits?
They are often used in international transactions to make sure payment will be received. As many SMEs will be familiar, trading abroad can be difficult due to the added complexities of ensuring payment and communicating across both language and culture barriers. Getting to know the laws and complexities of doing business in different countries can be difficult, and using letters of credit has become an important part of foreign trade.
The bank will also act on behalf of the buyer to make sure that the seller is not paid until the bank receives confirmation that the goods have been shipped. Letters of credit act as an added safety net throughout the process of international trade and help to make sure all parties are confident during a transaction that might span the length of the globe.
The government has already highlighted the importance of the export market for helping the UK economy to get back on its feet. With domestic markets currently in a tough position, many small businesses are taking advantage of more buoyant markets abroad. The internet is levelling the playing field amongst small and large businesses alike, so exporting is far more accessible than it used to be.
Letters of credit act as a third party watchdog to survey transactions and to help make sure your company gets paid. Trading abroad can have any number of pit falls, so it pays to be prepared. So, does your business need to consider trading on letters of credit?