A Letter of Credit as a Payment System: International Sales Transactions - Research Paper Example

In international trade, there is a chance that both exporter and importer are doubtful regarding sending goods and payments. Exporters may be concerned that if they transport goods and services to the importers in advance, the importer may fail to pay due to various reasons. Importers may be concerned that if they make payments in advance, the goods may not be transported, or the quality of the goods transported maybe not as expected or there can be a time delay in sending goods etc. Capela emphasizes that letters of credit are used mainly to protect the interest of both parties of international trade.

Where letters of credits are used in international transactions, the risk associated with payment is transferred to the banks. The payment undertaking is actually given by the bank. The advising bank makes payment to the exporter upon the submission of necessary documents like a bill of lading or airway bill, certificate of origin, insurance documents, export invoice etc. the advising bank goes through the documents presented by the exporter, and does not have the responsibility to check goods to be transported.

Same time, importer gets a guarantee that advising bank will scrutinize the documents presented by the exporter so that he can ensure that goods will be shipped on time. The letter of credit must specify the maximum amount which the bank entrusts itself to pay. Few individual countries in the world have gone for special legislation governing letter of credit due to the highly international character of the letter of credit.