The import and export of goods throughout the world is usually arranged by means of L.C. the importer requests his bank to open a L.C in favors of the exporter. The bank issues a L.C to the exporter as a requested. This L.C is a promise or guarantee by the bank to honor the bill drawn by the exporter promised the conditions of the L.C are fulfilled.
Paged has define a L.C in the following words:
“A L.C is an undertaking by a bank to meet the draft drawn to it by the beneficiary of the credit in accordance with the conditions laid down there in”.
The importance and advantages of L.C.
Advantages to the importer:
a. Satisfying the exporter:
An import of goods from abroad will have to satisfy the exporter that he will be paid for. The L.C enables the importer to satisfy the exporter that he will receive the price of the goods dispatched to the importer.
b. No risk about sales contract:
The importer doesn’t take any risk about the sale contract. He many are sure that the terms of the sale contract as mentioned in the L.C will be fully fulfilled, because of the opening as will be as in term diary bank are responsible for this.
c. Facility of payment:
The importer has not to pay the price of goods purchased until he receives the document of the goods by means of which he can tape the delivery of the goods.
Advantages to the exporter:
a. Security for payment:
A confirmed L.C provides maximum security to the exporter for the payment of the sale price. In view of the guarantee of the opening as well as confirming bank, he can be sure of receiving the price of his goods.
b. Immediate payment:
The exporter presents the documents to the issuing bank after the shipment of goods. The exporter bill is immediately paid by the issuing bank.
c. Pre-shipment finance:
Sometimes the exporter can get pre-shipment finance for the packing. Movement and even the purchase of the merchandise.
d. No concern after payment:
After receiving the payment draft from the issuing bank, the exporters have no further concern with the transaction.
Advantages to the banker:
a. Source of income:
The financing of imports and exports through issuing L.C is an important source of income of the banks. The issuing and confirming of L.C drawn under term for which bank charges reasonable amount.
b. Ownership of the goods:
Until the payment of the amount is due, the ownership of the goods remains with the bank.
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