Letters of credit

As you delve into bankers acceptances and learn more about them, you will most likely hear about letters of credit, and how they often go hand in hand with bankers acceptances in a lot of cases. But why? What do letters of credit actually have to do with bankers acceptances? Do international traders really need letters of credit to trade and acquire bankers acceptances? Is this just something that is done some of the time, or is it always necessary? Here are the facts about letters of credit, and how they fit in with bankers acceptances. 

The fist thing you should know about a standard import letter of credit is that it is negotiable and irrevocable.  It is, to the basic extent, a written undertaking which is issued by a bank at the request of it’s customer, who is the one applying for credit. This letter of credit is the statement by the bank that it is obligated to pay the seller of the goods a certain amount of money, which, in return, will be repaid by the buyer at the appropriate time. Of course, the necessary documentation needs to be provided in order for payment to take place.

This includes documentation including a bill of lading, an inspection certificate, a commercial invoice, visa documentation, etc. So, in this way, the credit standing of the buyer is actually replaced by the bank who is issuing the Letter of credit, both assuring the seller that payment will be made, and assuring the buyer that their credit will be enough to make the transaction. Transactions involving buyers acceptances and letters of credit have increased many times over the past three years, and it is because more and more sellers are looking to get into the global market, but are requiring better credit on the part of the buyer.
 

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