The Letter of Credit is difficult, but highly reliable

We all have heard more than once that a stable, developed economic system is primarily characterized by a stable banking sector. That is why the governments of almost all countries with developed market economies in every possible way contribute to the development of the banking system of their country. That is why all registered legal entities engaged in this or that kind of economic activity are required to have a current bank account for settlements with organizations, enterprises, private entrepreneurs, financial institutions, the budget and extra-budgetary funds. Hence the popularity of non-cash payments through the bank, among which a letter of credit is allocated.

The world practice of banking and local laws of most countries, including the Russian Federation, distinguish the following forms of documents for non-cash settlements:

• Calculations under the letter of credit;
• Collection orders ;
• Bills of exchange;
• Checks;
• money orders.

The simplest and most familiar form of payment for many enterprises and companies is the most common payment order. It is this method that is most often used when carrying out activities in the territory of one state. However, if you start working with foreign clients, this form ceases to suit you, and a letter of credit comes into your mind.

When entering foreign markets, such a criterion as simplicity is less attractive than legal reliability and financial security. While foreign trade transactions (export-import) are widely used both for settlements under letters of credit and for collection, it is best for these criteria to be met by a letter of credit. This calculation is also popular in that reliable foreign firms prefer to work exactly on the terms of payment under the letter of credit.

Nevertheless, many legal entities do not dare to take this form of payment, considering it rather complicated and expensive. However, you always have to pay for protection against risks, and for the sake of the advantages offered by the letter of credit, such as a 100% payment for the goods sold and 100% compliance with all terms and terms of the contract by both parties, you should study it.

A letter of credit is a form of non-cash payment, which is completely carried out under the control of banks according to the following scheme:

1. Having concluded the contract, the seller before the shipment of the goods requires the buyer to open a letter of credit in his name. The buyer fulfills this requirement through his bank.
2. The bank, with which the buyer cooperates, opens a letter of credit (a bank account in another bank, usually in the bank where the seller is serviced) and transfers the amount to the seller, but not to the current account, but to the letter of credit. These money are not available to the seller until you receive the goods.
3. The Bank opens a letter of credit. This is notified to the seller. Only after he was satisfied that the payment was transferred to the credit account, the goods are delivered to the buyer, and the accompanying documents are transferred to the bank, which cooperates with the seller.
4. This bank sends documents to the buyer's bank to certify that they meet the conditions of the letter of credit.
5. The current account of the seller transfers funds for the goods sold, the buyer receives documents for the goods. Only after that he has the opportunity to receive the goods and dispose of it.

The letter of credit is arranged by the seller (the bank receives money for the goods in advance, before sending the goods) and the buyer (the money is transferred only if the contract is fully respected).

The accreditation form of settlements is carried out according to the rules, among which the most important, such as mandatory requisites and terms of execution are noted. These and other conditions for the circulation of letters of credit are always determined and regulated by the National Bank of the State. In Russia, these rules can be learned by studying the Regulation on non-cash settlements.