Letters of credit are used primarily for large transactions between customers in one country and suppliers in another. Due to the nature of international trade, the details of the different transactions and factors such as national legislation, distance and the difficulty of personally meeting all business partners, letters of credit have become an important tool for conducting business transactions. . The main characteristics of this type of financial instrument are revocability, negotiability, demand and time bills, and transfers and assignments. Letters of credit are also used for public facilities such as water tanks, sidewalks and streets, guaranteeing that they will be built. Letters of credit are usually irrevocable, meaning they cannot be canceled or changed without the consent of the confirming bank, issuing bank, or beneficiary.
To receive payment, the shipper or exporter must present certain documents. These include financial documents such as the co-accepted draft and the bill of exchange, which is a negotiable instrument that guarantees payment at a certain time or on demand. Commercial documents to be submitted include an invoice and a packing list, also known as a delivery note, packing slip, and unpacking note. The packing list is used to inform customers, government authorities, transportation agencies, and other parties about the contents of a package. The shipping documents that can be presented include legal, commercial or official documents, insurance certificates and transport documents. An air waybill, AWB or air waybill is a receipt issued by international airlines as proof of a contract and for shipped goods. The air waybill can be used as a bill or invoice along with supporting documentation, indicating the charges due to the air carrier or agent and the expenses to be covered by the consignee. Air waybills display the carrier’s logo, name, head office address, and eleven-digit number.
Known as B/L and BOL, a bill of lading is a transport document that must be presented by the shipper or exporter. It can be issued by a carrier and involves the use of different modes of transport: sea, air, land and rail. Transport documents are also the carrier’s cargo receipt, other than the mate receipt, and the rail receipt.
Official documents also include certificates of origin, legalization of embassies, licenses and inspection certificates. Finally, the insurance documents that can be presented include certificates and insurance policies.
There are different international payment methods, including direct payment, documentary collection, documentary credit and payment in advance. Direct payment is a secure payment method for the buyer while documentary collection is for both the buyer and the seller. Documentary credit and payment in advance are safer for the seller.
It should be noted that letter of credit transactions involve certain risks, including legal risks, regulatory and sovereign risks, and fraud risks. Risks to the applicant include late or early shipment, inferior quality, non-delivery of goods, and more. Products may be damaged in transit or insufficiently shipped. It is important that sellers review the requirements and submit all documents on time.
