How can buyers and sellers located in different countries ensure that the other can be trusted? How is the credit worthiness of the buyer established? How does the buyer know that the goods he has purchased are shipped?
The buyer needs the goods shipped from their origin or delivered to their destination before making payment to the seller. The seller needs to ensure that he gets paid by the buyer either before or upon delivery of the goods.
How are these specific issues addressed? This is where a letter of credit or LC comes in handy. It is a guarantee issued by a bank for payment to the buyer while ensuring that the goods are shipped in good order.
A letter of credit is a banking instrument that guarantees payment from the buyer to the seller. An LC issued by the bank appointed by the buyer, showing the seller as the beneficiary, guarantees payment in full if the buyer fails to make payment as agreed. When part of the payment has been made by the buyer, the bank will then pay the remaining amount to the seller.
The seller has to ship the cargo and deliver all the documents required for clearance of the cargo at the buyer’s end, to the nominated bank before he can get paid.
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