Disadvantages of LC (letter of Credit) to Importer.

 

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Demerits of Letter of Credit to Importer.

 

Letter of credit is operated by business world based on the guidelines of uniform customs and practice of documentary credit under notification 600 adopted on July 1, 2007 with a modification of UCP 500 followed previously.


Are there any demerits in operating an LC? If letter of credit has disadvantages to buyers, what are they? Let us discuss from the side of importers on demerits of LC.


One of the major disadvantages of letter of credit is that LC is operated on the basis of documentation and not on the basis of physical verification of goods on itsDisadvantages of Letter of credit (LC) for Exporter copy quality, quantity or other parameters. In other words, an LC issuing bank can effect payment to beneficiary of LC on the basis of documentation produced as per the terms and conditions of letter of credit. The parties under letter of credit do not have any right to physically verify the contents of goods. So, if the buyer needs to confirm and satisfy on the quality of goods he buys, he can appoint an inspection agency of international repute and instruct exporter to enclose certificate of such inspection by mentioning a condition in letter of credit.

Once opened a confirmed and irrevocable letter of credit, the importer/buyer already tied up with the said business credit line and can not change in between. Due to various reasons, especially on selling price variation, if buyer needs to stop his export order he can not do so.


Compared to other payment mode of transactions, cost of operating letter of credit procedures and formalities are more, which may be an additional expenses to an importer especially on amendment, negotiation etc.


Currency fluctuation is another disadvantage of Letter of credit. Normally buyer/importer places purchase orders once in a year and opens letter of credit accordingly. The exchange rate may differ at the time of effecting payment. So, if any loss due to fluctuations in foreign currency contracted under letter of credit, need to be beard by him. This is also one of the major demerits of LC.


Currency fluctuations may also effect on price variation in local market. The demand of imported goods may reduce due to such fluctuation of foreign currency. So currency fluctuation also is a threat under letter of credit which is treated as other disadvantages of letter of credit.

 

 

 

 

You can also read more information by clicking   Letter of credit - How does LC work?      What are the advantages of Letter of Credit to Exporter? How LC is benefited to Importer?    What are the disadvantages of LC to an exporter?   Who are the parties involved in Letter of Credit?   How to check authenticity of LC? What is Prime Banker?  Yes, I am sure, once after going through that articles you will have a good knowledge about Letter of Credit.

In this article, we have discussed about the disadvantages of Letter of Credit to Importer.  Do you have different thoughts on disadvantages of letter of Credit to an importer?   Do you wish to add more information about disadvantages of LC to importer? Share below your experience about disadvantages of LC for an Importer.

 

The above information is a part of Export import business Course online

 

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Comment below your thoughts about this article - Disadvantages of LC to Importer. 

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Comments


khetesh mewada: bank margin amount is 100% so none of importance of LC for buyer because we cant use that margin money in other sources and imports goods any impurites we can not stop the payment and finally bank get major advantage like certain bank charges so LC's importance on its margin

Md.Rashidul Islam: I think this site is very helpful & effective for the new comer's who are interested to know about export&import

pradeep gour: A very balanced and informative article. Very practical indeed. Warm Regards- Pradeep Gour

FAJLUL BARI: this side is important who are the interested about to export & import.

pradeep gour: Excellent article,very informative and authentic.

joseph briffa: IF am dealing as an agent, am selling a cargo of goods and the buyer opens a letter of credit in my name. Can i use the same LC made by the buyer into my name as LC in the name of the manufacturer? Thanks in advance, Joseph Briffa

ashraf: I need to know about hedging to prevent loss due to exchange rate fluctuation, and how can we do it?

Admin: Hi Asharaf, Pl read http://howtoexportimport.com/Does-exchange-rate-of-currency-effect-export-busin-67.aspx

Zealot9: Hello! Can anyone please explain to me about foreign Collection? When is it good to use? Thanks!

S K Mahapatro: Sir, I am facing a problem recently. I have opened one LC for a foreign supplier who happens to be our regular supplier. The LC was wrongly opened with 100% payment terms as against the PO terms of 90% thru LC and balance on receipt of material. Now when I tried to amend the clause, the party's bank did not agree telling that supplier is not agreeing to it. Now the problem is that ship has already arrived at Vizag port and by not retiring the original documents, we may have to pay detention charges. Please help if we can avoid payment and release cargo on the basis of indmnity bond? Or is there any other way? Can our bank amend without their consent? Or can we avoid payment unless party amend the LC and release the cargo? what re the ways?The supplier is not agreeing and relating to some other issue with past consignment.

Gautam: I am a financier based in chennai, one exporter has approached me to finance his export order. The terms of payment are irrevocable lc at sight. I wish to risks involved and how can I mitigate my risk in this regard .

Kushal Bk: Sir i want to know what are the documents required for importing coffee products to india through Air Cargo or courier or through Sea can you please help me out

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