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The role of Letters of Credit LC in export and import

The role of Letters of Credit LC in export and import

BlogDate: 09-10-2023 by: Ngan Le

When working in the import-export field related to payment issues, we cannot overlook the method of Letters of Credit (LC). Especially in the steel industry, the use of LC becomes increasingly important because the value of shipments is typically high and the product quality requirements are very stringent. In this article, let MRS Steel learn about the role with the pros & cons of LC payment in import and export.

Definition and the important role of LC in import export

LC is an abbreviation for Letter of Credit, which is a letter created by a bank at the request of the importer (i.e., the buyer in a merchandise transaction). The main purpose of the letter of credit is to establish a monetary commitment between the importer (buyer) and exporter (seller) at a specific point in time. Accordingly, the bank will represent the importer in making payments when the exporter provides appropriate payment documents as stipulated in the previously agreed LC.

The LC payment in export and import plays a crucial role for transactions as it stands as a credible connection between two representatives from different countries, ensuring both parties feel secure about their benefits. In many cases, the exporter (selling party) also has a representative bank, and the seller will transfer this valid set of documents to their representative bank in the exporting country. Thus, the importer, exporter, and bank are the entities involved in the LC payment process.

Pros and cons of LC payment method

There's always the presence of two banks representing both sides along with stringent requirements to balance opposing interests in LC payment in export and import. Therefore, in many situations, the Letter of Credit (LC) has its advantages and disadvantages.

Pros

Ensuring secure transactions for both parties: Once the bank issues an LC, the exporter can trust that they will receive payment, as long as they comply with all conditions stipulated in the LC. Similarly, the importer only has to pay when all conditions in the LC are correctly met, meaning when the goods are delivered on time and meet the requirement. Importers can feel secure about their interests since the LC forces the exporter to adhere to regulations to get paid.

Reducing risks about market fluctuation: Steel belongs to the category of goods whose exchange rates continuously change in the international market. In the worst-case when the counterparty refuses to pay due to a drop in steel prices after a contract has been signed, the bank will still proceed with the payment steps as previously committed.

Legal recourse capability: Commercial transactions between two countries can differ significantly in terms of legal systems, business cultures, and economic situations. In case of disputes, the LC provides a clear legal framework for involved parties, thereby reducing the risk when one of the two sides fails to commit to payment.

Cons

High cost: the value of steel shipments in import-export transactions often takes place on a large scale with high transaction value. Therefore it forces many banks to participate, thus the fees related to opening and confirming a LC can be high.

Complexity: LC requires a substantial amount of documentation and strict adherence to conditions, so all participating parties are meticulous in the documentation process. Hence, even a minor error in document verification can delay the payment process. Furthermore, once an LC has been issued, amending its terms becomes quite challenging without the consensus of all involved parties.

Banking risks: In cases where the bank issuing the LC faces payment difficulties, the seller might be exposed to risks.

Payment assurance without quality assurance: Specifically, the bank stands as the entity responsible for document verification, they are not related to goods quality inspection. Hence, there's a significant possibility that businesses might receive poor-quality shipments, even though their payment rights are secured.

Overview the processes of LC payment in export and import

Steel import-export transactions are always complex due to the time consumption and cultural differences as well as the geographical distance between two countries. Therefore, the payment process requires the involvement of multiple parties, not only between the exporters and importers but also logistics providers and payment representatives. Below is the detailed procedure to initiate the LC payment in export and import.

Determine terms and conditions

Both the importer and the exporter must first agree on the conditions within the foreign trade contract and the payment step will be specified by using the documentary credit method L/C.

Request for opening L/C

After reaching an agreement with the exporter, the importer will refer to the payment terms in the contract and request the bank to open the L/C. Typically, when opening an L/C, the importer must deposit a margin ranging from 0% to 100% based on the value of the cargo to ensure payment capability.

Notification and confirmation of L/C

Upon deeming it appropriate, the issuing bank will proceed to open the L/C and notify the exporter's bank. If consistent with the credit letter, the bank that opens the L/C will pay the bank's exporter and send the set of cargo receipt documents to the importer.

Exporter reviews and delivers as requirement

The exporter will carefully review the content of the letter of credit. When the delivery time arrives, the exporter will provide the set of payment documents as required by the L/C and send them to the L/C issuing bank on the importer's side.

Check L/C and proceed with payment

After receiving the documents from the exporter, the L/C bank must verify the validity of the document. If the documents are incorrect, the bank has the right to request adjustments, if it's valid, the bank that opens the L/C will pay the notifying bank and send the set of cargo receipt documents to the importer.

At this point, the importer receives the documents from the bank opening LC and checks them. If found satisfactory, they will make payment to the bank.

Choosing a reputable steel supplier to minimize risks in export-import transactions

In the process of participating in LC in export and import transactions, banks play a crucial role as they directly affect both parties. Not only do they ensure payment for the exporter, but they also take responsibility for the importer receiving the goods as per the agreed requirements.

Similarly, as an importer, choosing a reputable exporter is equally essential because the bank's responsibility is limited to checking and verifying documents, so they're not related to the quality of goods. Thus, partnering with a reputable steel supplier ensures the quality of the goods and avoids any risks about the quality for the project.

MRS Steel - the provider steel solutions for importers always ensures the provision of steel grades that meet quality standards. Moreover, we have diverse steel supply from major factories like Hoa Phat, Hoa Sen, and Nam Kim, so each steel product we offer undergoes rigorous inspection processes to ensure maximum value for your project.

MRS Steel is not just a steel solutions provider but also we are a hub sharing knowledge and experience in the steel industry. Partnering with MRS Steel means not only purchasing high-quality products but also receiving expert consultation and attentive sales services from our sales team.

Importers who need product advice suitable for projects or detailed pricing are welcome to contact us at the email vanloc@mrssteel.com.vn or on Whatsapp: +84 76 911 2358.