Why Use a Letter of Credit?
Letters of credit may be used in international trade for a number of reasons, some of which are detailed below. • New Trading Relationship It may often be advisable to use a letter of credit in a new trading relationship as security is given to both the exporter and the importer. The exporter knows that he will get paid if he complies precisely with the letter of credit and the importer can ensure that he requests all the documentation required by the contract of sale and purchase and knows that the exporter will not be paid unless he complies with the letter of credit terms. However, for the exporter, this decision should be made carefully with thought given to the cost of using a letter of credit and the fact that competitors may be prepared to trade on more flexible payment terms. Once a stable trading relationship is established the situation should be re-assessed and consideration given to more flexible and competitive payment terms, where possible. • Letters of Credit Required by
