Question

Explain how and why letters of credit and other trade documents are used in an international trade transaction.

IN A 1 PAGE RESPONSE PLEASE

Answer 1

Letters of credit serve their function by replacing the bank's credit with the customer's credit in order to encourage trade. There are two styles basically: Commercial and Standby. The company letter of credit is the main payment mechanism for a contract, while a secondary payment method is the standby letter of credit. For centuries commercial letters of credit were used to encourage payment in foreign trade. Its use will continue to grow as the global economy evolves.

A commercial letter of credit is a contractual arrangement between a bank, called the issuing bank, authorizing another bank, known as the advising or verifying bank, to make payment to the beneficiary on behalf of one of its customers. The issuing bank opens the letter of credit, at its customer's order. The lending bank makes an undertaking to respect drawings made under the loan. As a rule, the beneficiary is the manufacturer of products and/or services. The issuing bank effectively replaces the consumer of the bank as payer.

The recipient is entitled to pay as long as he can supply the documentary evidence that the letter of credit requires. The letter of credit is a different and distinct transaction from the contract it is based upon. Both parties deal not in products but in papers. The issuing bank is not responsible for the results of the Customer-Beneficiary underlying contract. The duty of the issuing bank to the buyer is to review all documents in order to ensure that they meet all credit terms and conditions. Upon demanding payment the recipient warrants compliance with all terms of the agreement. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.

Commonly, credit letters are negotiable. The issuing bank is obligated not only to pay the recipient but also any bank appointed by the recipient. Negotiable instruments are transferred, almost in the same way as property, from one party to another. To be negotiable, the letter of credit must contain an unconditional guarantee of payment, on demand or at a stated time. In due course the designated bank becomes a holder. As a holder, the holder shall, in good conscience, take the letter of credit for value without warning of any claims against it

The goods and services are paid. It includes a description of purchaser and seller's merchandise, size, FOB origin, and name and address. Details regarding buyers and sellers will conform exactly to the definition in the credit letter. In the other accompanying documents, a standardized definition of the product is generally appropriate unless explicitly specified otherwise in the letter of credit.

A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the transportation or carriage of goods. Documents proof products regulation. They often act as a receipt for the delivered products and as evidence of the carrier's duty to deliver the goods to their proper destination.
A guarantee issued to a purchaser of goods by a seller claiming that the title to be transferred is nice and the transfer is valid. It is a process by which simple title is approved for product transfer. This is usually given to the buyer and issuing bank that reflects an arrangement to indemnify and benefit all parties.