Benefit of Letter of credit for both buyer and seller are given below:
Letter of credit advantages for seller:
1. The seller has the obligation of buyer's banks to pay for the shipped good
2. Reducing the production risk, if the buyer cancels or changes their order
3. The opportunity to get financing in the period between the shipment of the goods and receipt of payment (especially, in case of deferred payment)
4. The seller is able to calculate the payment date for the goods
5. The buyer willnot be able to refuse to pay due to a complaint about the goods
Letter of credit advantages for the buyer:
1. The bank will pay the seller for the goods, on condition that the latter presents to the bank the determinesd documents in line with the terms of the letter of credit;
2. The buyer can control the time period for shipping of the goods;
3. By Letter of credit, demonstrate their solvency;
4. In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to the buyer.
5. Providing a letter of credit allows the buyer to avoid or reduce pre-payment.
Difference between Letter of credit (L/C) and TT:
TT means Telegraphic Transfer, Telex Transfer or Wire Transfer, the transfer of funds from one bank account to another by electronic means. A wire transfer or Telegraphic Transfer is made when you are ready to pay for goods or services received. The transfer is usually irrevocable such that the receiver is protected against a return payment. Once a transfer is received, which is ok to ship goods, deliver services or sign closing documents at time of sale.
LC means " Letter of credit", an instruction from buyer to a foreign bank to pay the seller a sum of money when certain conditions are met. A LC is used to take the risk out of buying or selling goods to a company that is unknown or possibly not creditworthy. The buyer opens the letter of credit at their bank and delivers it to the seller. The seller then can take the L/C to buyer bank to remove the credit risk in the transaction. A documentary L/C allows the shipment of goods or a service to be rendered when bill of lading, affidavits of complaince are completed, or sworn statements of performance done. The bank merely deals in the documents and passess payments as a result. An L/C can take a week or more to set uo. If it is a confirmed L/C, it can take longer.