The Letter of Credit Payment Mechanism

Paper Summary:

This study defines and describes the payment mechanism of the letter of credit, its usage and importance in international financing, as well as the contribution of this financial tool to the risk reduction in commercial and non-commercial transactions. This paper is concluded by the ending thoughts of the author regarding the above mentioned topic.

Outline:
Definition of the Term Letter of Credit
Importance in International Transactions
Letter of Credit Reduces Risk in Commercial Transactions

From the Paper:

"The letter of credit is used by many commercial players in the world market, especially for the individual advantages and benefits it brings. From the seller's point of view, the letter of credit promotes certainty that all the conditions mentioned in the import-export contract are integrally observed, within the established period and the amounts stipulated in the documentation. The Seller may also offer the buyer a supplier credit, having a specific financing method: the submitted documentation is discounted under the particular export letter of credit - in this way, the payment will be made by the payer's bank soon after the date of the shipment, and not on maturity like in the usual case. In case the exporter is an intermediary among an international transaction, it can transfer the letter of credit to other subcontractors, or can cede the encashment resulted from this particular payment instrument. The importer has the certainty that the payment is realized only if the shipment of merchandise is performed only in the stipulated conditions, as these conditions must be demonstrated using the documents submitted by the exporter."

Sample of Sources Used:

• Koudriachov, S. 'The Application of the Letter of Credit Form of Payment in International Business Transactions' (2001) 10 Int'l Trade L.J. p. 37
• Aaron Larson - 'The Letter of Credit' - Law Office of Aaron Larson, definitions and examples found on Expert Law library, August 2004. http://www.expertlaw.com/library/finance/letter_of_credit.html
• Marget L. Moses - 'Controlling The Letter of Credit Transaction' - Connell Folley Attorneys at Law office http://www.connellfoley.com/articles/moses1.html

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