Letters of Credit are as old as banking itself. They are based upon the fact that the creditworthiness of an unknown Buyer is thus replaced by the creditworthiness of a known Bank or financial company. MTG often has to stand in the shoes of its customers and give some form of undertaking that payment will be made provided certain conditions are complied with. This mechanism is called as Letter of Credit or Documentary Credit. Although there are various types of Letters of Credit, people are most likely to be familiar with the terms Import or Export Letter of Credit.
When a Buyer applies for an Import Letter of Credit it specifies the exporter, the amount, the currency, the maturity date, the nature of goods, as well as any other payment terms. The Exporter in his country is then advised that a Letter of Credit has been opened in his favour, therefore he is the beneficiary of an Export Letter of Credit. Therein, the Exporter ships the goods to the Importer and presents all the required documents to the bank. The bank checks the documents for complying with the Letter of Credit and makes payments to the Exporter. At the end, the bank claims settlement from the Importer.
Letters of Credit are used in situations where proof of a seller or buyer’s standing is needed. You can exemplify this as a reference on a job application. Someone reputable is giving the necessary party information stating that the individual is responsible enough to partake in the transaction. These types of letters can be used in many types of transactions, including, but not limited to the following: real estate, international trade, stocks, and more.
A standard, commercial letter of credit (LC) is a document issued by a financial institution, used in trade finance, which provides an irrevocable payment undertaking against submission of documents and compliance of other conditions as per LC terms. Letters of credit are used primarily in international trade transactions, for deals between a supplier in one country and a buyer in another. LC is issued at the request of buyer (Applicant) in favor of supplier (Beneficiary) by the applicant’s bank (Issuing Bank). This service eliminates the risk of non-payment in international trade transactions.
This service offers an assurance of payment for export shipments based on presentation of documents that comply with the Letter of Credit.
This facility facilitates international trade transactions. Since the buyer is in a different country, the exporter is assured of payment once the goods are shipped, against presentation of shipping documents per the LC terms.
This also facilitates the exporter to raise easy finance from his banker for manufacture of goods as the LC is irrevocable and backed by the undertaking by the issuing bank to pay against the presentation of documents per the LC terms and compliance of other conditions per the LC.
MTG is able to provide access to one of the top Bank Guarantee providers, giving you the confidence to trust our services for your credit letter needs. By providing the necessary documentation to assist in proving a buyer or seller’s trustworthiness, institutions such as MTG can significantly help businesses and contribute to the furtherance of international trade. These transactions are risky, at best, since neither party has a pre-existing relationship.
With the help of a Letter of Credit, the parties will be able to ease their conscience about the risks. Without the inherent fear of the unknown, trade could become more common, and businesses could more easily help each other without the classic “will she or won’t she” mentality. Additionally, these types of documents allow a business to show their trustworthiness to future contacts. By having this on file as part of previous projects, future clients can be assured that you are trustworthy, and committed to integrity in your work. Contact us today to let us help you with your Letter of Credit needs.
