Letters of Credit Essay Example for Free

Letters of Credit EssayThe expend of the letter of creed in transnational swop has for a long term been an easy way of carrying out business operations without really having to use the source of the applicants cashbox. Letters of reference usually take the place of a savings tills credit and enhances the speed of achievements when utilize properly.1 Usually, the letter of credit serves to represent an importer of goods as well as the exporter a chance to go a head with their business transactions even when there is no real fluidity money available to either party. Letters of credit, however, present very m whatever challenges to both the exporter and the issuing assert because they argon usually documents that cannot be revoked under au thereforetic circumstances and so exposes some players to a lot of risk. A key concern has been the nature of the conditions that ought to be met before such documents can be recognise by the exporters bank which usually has to re ly on information from the importers bank.2It is on the basis of the intricate issues that surround the letter of credit and its use that this paper seeks to critically discuss it especially when used in the context of international trade. Of particular interest, though, is a discussion of the undue exposure to losses and different risks on the issuer of the letter of credit, particularly in instances when the applicant or beneficiary of the letter of credit does not duly perform ones obligations or wrongfully obtains payment.The Working of a Letter of CreditFrom a business point of view, it is usually very important for an importer of goods and who holds an account with a local bank to seek for the financing of the bank for goods that are to be sourced from another(prenominal) country.3The reasons this is appropriate range from an ability to facilitate the business transactions and ensure a instantaneous and timely transfer of the goods from the exporters location to that of the importer, and to reduce the costs that could be incurred in having to use other means of payment to pay for goods in another country means of which are not always available. Therefore, from the business point of view, a letter of credit serves to enhance the general business transactions involving international trade.Where the challenge comes in is that point when it is never drawn or requested unless there is some form of credit that needs to be transferred. Actually, the letter of credit is used as an exchange of the credit of the bank and that of the buyer. Here, issues of compliance with the terms and conditions of the letter of credit poses m each challenges and risks to the issuing bank as well as the advising bank which literally transfers the credit to the exporters account. This results because of the manner in which the transactions are conducted.First, an importer in the United Kingdom orders for coffee beans from a farmer in Brazil. The farmer insists that the coffee be ans can only be exported or ferried on condition that the payment for them is paid within forty days from the time the transaction is entered into.The UK importer cannot get to Brazil to make the payments but there is a way that the exporters bank can communicate with the importer so that the credit can be transferred. However, the buyer does not want any undue risks so he does not offer cash to his bank but asks for a letter of credit to be drafted with the Brazilian coffee exporter as the beneficiary. The UK bank makes an arrangement with this importer and because he satisfies the conditions required, the bank drafts a letter of credits and transfers it to the beneficiarys bank in Brazil. That advising bank then verifies the details of and terms of the letter of credit and duly pays the exporter.Once this is done, it is all to the exporter to ship the coffee beans to the UK. Only then can the advising bank (the exporters bank) be able to seek for the payment for the goods in accor dance with the terms and conditions of the letter of credit. As can be clearly seen, there are so many processes involved and it all boils down to four main players who are bound to lose or benefit. There are the bank of the exporter, the bank of the importer, the exporter and the importer.commercial Letter of Credit and Standby Letter of CreditIt is always important to draw a distinction between two types of earn of credit commonly used in international trade and to ascertain the roles each plays towards enhancing payments for imports by a customer.4 The commercial letter of credit is the most widely used and its use is restricted to the actual exchange of credit on behalf of the customer of a bank. It is the commercial letter of credit that will be needed by the advising bank or the exporters bank in order to effect payments.However, owing to the risks to the issuing bank regarding defaulting on the part of the importer who is also its customer, the issuing bank usually drafts an d issues another letter of credit for the purposes of proving the credit worthiness of the importer. This particular letter of credit, therefore, serves the function of guaranteeing the advising bank and the exporter that the importer will actually pay for the goods. This reduces the risks inherent in international trade.5Based on this fact, it can be fairly argued that an issuer of the commercial letter of credit will be protected significantly in the upshot of failure by the beneficiary to adhere to the terms and conditions of the letter of credit. To a significant level, having the standby letter of credit protects the issuer because it cannot be allowed to pursue the property of the importer and domesticize the money or it can fail to pass the money to the advising bank. In accordance to the UCP provisions, the banks are protected only mildly when it comes to failure by bargainer to honor their part of the contract regarding payments to be submitted. For instance, the UCP ne ver really form part of the official international trade rules and are only applicable when the parties to the trade deal believe it is right for them.The absence of a clear equity, therefore, that emphatically seeks to help issuers of letters of credit means that they are exposed to many risks. The law in this country regarding international trade in general and letters of credit in particular tend to offer protection to consumers more than the issuer of the letters of credit. It is almost always believed that banks have the right and the capacity to set up their own terms and conditions which they believe are sufficient enough to protect them from any acts of fraud by traders and as such not a lot of protection is offered them under the law.International trade law will also protect the local bank and not the foreign bank, meaning that in the event the local bank, which is the issuer of the letter of credit, has already passed on the money to the advising bank, then there is lowe r-ranking that can be done to recover the money especially in cases where the trader fails to honor the obligations to pay the bank due to bankruptcy or any other reason.This is because the law on bankruptcy protects the importer from the actions of banks that can lead to further legal battles. If such an importer files for bankruptcy during the period when the goods are yet to be delivered to him, then there is nothing the bank can do to recover its money.6 A person declared bankrupt is protected from his debtors until at such a time when the bankruptcy can be lifted. This clearly renders the issuer of the letter of credit to such a trader incapable of recovering its owed monies.1 Campbell, Dennis. REMEDIES FOR INTERNATIONAL SELLERS OF GOODS 2008 Volume II. Lulu.com, 20082 Edwards, George. Foreign Commercial Credits A Study in the Financing of Foreign Trade. General Books LLC, 20093 Great Britain. Law Commission. Company security interests a consultative report. Routledge, 20054 Cr edit query Foundation. Understanding and Using Letters of Credit, Part I (1999). Retrieved 08/16/2010 from http//www.crfonline.org/orc/cro/cro-9-1.html5 Warner, Susan. The Letter of Credit. Kessinger Publishing, 20076 LLL. U.C.C. ARTICLE 5 LETTERS OF CREDIT . (2005). http//www.law.cornell.edu/ucc/5/article5.htm