Fri 20 Feb 2009
Irrevocable Letters of Credit
The advent of the Internet Age has not only meant that people have the chance to open their own business, it has opened markets for that business all over the world.
Just think; halfway across the world, there are two countries that contain a third of the human population of the Earth.
We're talking India and China, and the fact that most people in those countries can now connect to the Internet means big business potential for any company.
The problem with conducting international business, particularly over the Internet, is ensuring that you are paid for the products or services you provide. You could make it clear to international customers that you won't be providing or shipping until payment has been made, but this might lose you potential clients.
A better way to go is an irrevocable letter of credit (also known as L/C). Here is how it works.
You have a client or customer from another country, and both of you have agreed on the terms of a sale (this can take place by phone, fax, or email). Once established and documented, the client will go to a bank in her own country to establish an L/C.
The bank then opens the L/C in the name of the customer, naming your company as the recipient. The L/C is then sent to your bank and you need to confirm that it has been received (remember to include all terms and conditions on both sides).
Your bank sends you a copy of the L/C with the letter they sent confirming its receipt.
Review the letter and make sure you can meet the specified dates of shipment and so on. If you are shipping goods, then you need to get your freighter forwarder to prepare a statement of all goods on the shipment as well as the date they were shipped, and then take it into your bank.
The records indicate that the shipment is on the way to the bank, which will then send the documents to your customer's bank, which will review it and then pass it along to the customer.
Once the goods arrive, the customer claims them with the paperwork, and your bank then places the money into your account.
Remember that letters of credit are only one way to receive international payments. They may sound like a lot of involved work but really there aren't many more steps than with any other type of transaction.
The most important detail of this type of transaction is that it prevents messy hold ups when it comes to payments and different credit laws of different countries by sticking to bank transactions.