advantages and disadvantages of letter of credit

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is related to the banking and insurance of international finance which includes LOC most important document for and international trade given by bank to their clients
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  • 1. ADVANTAGES OF LETTER OF CREDIT TO IMPPORTERS. • DOCUMENTARY PROOF AND SECURITY TO BUYER FOR FUTURE PLANS. •LETTER OF CREDIT REDUCES RISK FOR THE BUYER . •Since buyer is the holder of Letter of credit, Bank acts on behalf of buyer. This arrangement protects importer and minimize time, as bank acts on behalf of him. •A letter of credit transaction reduces the risk of non performance by the supplier.
  • 2. •exporter/seller receives payment of exported goods only after shipment and meeting of all necessary requirements under LC terms and conditions with presentation of documentary proof including evidence of shipment. •easier planning for the importers •Smooth and efficient execution of the business plan
  • 3. ADVANTAGES OF LETTER OF CREDIT TO EXPORTERS. •The major advantage of Letter of credit to a supplier is minimizing of credit risk. •PAYMENT GUARANTEE BY THE BUYERS BANK. •Buyer can not deny payment by raising dispute on quality of goods, as letter of credit terms and conditions are based on documentation. •In a letter of credit, any dispute in transaction can be settled easily, as LC terms and conditions are under the guidelines of uniform customs and practice of documentary credit.
  • 4. • SECURITY TO THE EXPORTER. • all required documents have been mentioned well in advance of shipment and there is no confusion or misunderstanding to the importer (buyer) to inform supplier to act in between. • exporter receives money on time. • Meeting delivery schedule by proper production plan is one of the major advantages under a letter of credit terms of business
  • 5. DISADVANTAGES OF LETTER OF CREDIT TO IMPORTERS. • Based on documentation and not on physical verification of goods. • cost of operating letter of credit procedures is more compared to other payment modes. • Currency fluctuation is another disadvantage of Letter of credit. • Currency fluctuations may also effect on price variation in local market. The demand of imported goods may reduce due to such fluctuation of foreign currency.
  • 6. DISADVANTAGES OF LETTER OF CREDIT TO EXPORTERS. • liability of meeting all required parameters are with supplier failing which bank may not accept documents under such transaction. • Additional expenses has to be met by the seller if buyer insists on doing so. • Compared to other modes of payment, the expenses for opening, negotiating and other procedures of letter of credit is high. This is another disadvantage of Letter of credit for an exporter.
  • 7. • If a cold ware is being continued between two countries, due to political reason, the trade bilateral agreement between such countries may become void, resulting to effect the guidelines of uniform customs and practice of documentary credit. This is another demerit of LC for a seller.
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