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Letters of Credit - Tips for the Importer/Buyer
- Before opening a letter of credit, the importer/buyer should reach agreement with the exporter/seller on all particulars of payment procedures, schedules of shipment, type/description of goods to be sent, and the documents to be supplied by the exporter/seller.
- When choosing the type of letter of credit to be used, the importer/buyer should take into account standard payment methods in the country of the exporter/seller.
- When opening a letter of credit, the importer/buyer should keep the details of the purchase specific and concise.
- The importer/buyer should be prepared to amend or renegotiate terms of the letter of credit with the exporter/seller. This is a common procedure in international trade. On irrevocable letters of credit (the most common type) amendments may be made only if all parties involved in the letter of credit agree.
- The importer/buyer can eliminate exchange risk involved with import credits in foreign currencies by purchasing foreign exchange on the forward markets.
- The importer/buyer should use a bank experienced in foreign trade as the letter of credit issuing bank.
- The validation time stated on the letter of credit should give the exporter/seller ample time to produce the goods or to pull them out of stock.
- The importer/buyer should be aware that a letter of credit is not fail-safe. Banks are only responsible for the documents exchanged and not the goods shipped. Documents in conformity with letter of credit specifications cannot be rejected on grounds that the goods were not delivered in good condition or of highest quality.
- Purchase contracts and other agreements pertaining to the sale between the importer/buyer and exporter/seller are not the concern of the issuing bank. Only the terms of the letter of credit are binding on the bank.
- Documents specified in the letter of credit should include those the importer/buyer requires for customs clearance.
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