Is Letter of Credit LC safe for an Importer?

 

 

As we know, Letter of Credit is operated based on the guidelines governed by the rules and regulations of UCPDC 600 (Uniform Customs and Practice for Documentary credit 600 which came in to effect as on July 1, 2007. In a letter of credit, the buyer’s bank guarantees payment of proceeds to the seller through his bank against Is Letter of Credit LC safe for an Importer copy presentation of documents as per the terms and conditions of Letter of Credit.


We have discussed about the safety of letter of credit for an exporter point of view in same web blog. Now let us discuss whether Letter of credit is useful for an importer. Is there any disadvantage for an importer to go ahead with letter of credit against his purchase from supplier?

Letter of credit is commonly accepted by both buyer and seller for their business transactions worldwide. Since the importer and exporter situates far away from their work place, Letter of Credit bridges gap between buyer and seller not only on credit risk but also to minimize time, settling dispute apart from credit worthiness of buyer. The major advantage of a letter of credit is that it provides security to both seller and buyer.


Under LC, payments are made against documents. The quality, contents and quantity of goods are immaterial. Inspection agency can be appointed for quality, quantity and supervision of stuffing also with reliable inspection agencies and based on their cortication. Bank deals with documents and not with goods, service or performance.


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. Also read How to get export order from foreign buyers?

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?   Are there any disadvantages to importer for a consignment under Letter of Credit?   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.

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Comments


RAKESH KOUL: sir i have one question as an importer, if i first asked for proforma invoice for three machines from the exporter and accordingly pay advance for three machine say cost of three machine was 150$ and i paid 20% advance say 30$ to exporter, now at the time of machine trials my requirement is for one more machine, and asked proforma for 4 machines and adjusted advance in this proforma and paid balance payment, will be there any problem in our bank through which payment was paid, will RBI raise any query as the advance was paid for three machines now 4 machines are coming

Gaurav: I want to import led products from china. I have a registered firm in india. I don't have import license, trade license or any such license. As a beginner what should I do. As I have gone through the several blog. MRP of the product is also necessarily printed on the product. does the import tax affects the MRP printed. FOB is calculated on which amount, i.e buying rate or MRP. Should I get the import license to save money. How to get the Letter of Credit. What are the other major license, certificate etc required to import LED products from CHINA and sale in INDIA.

Admin: Hi Gaurav, Contact an export import consultant at your area

Stella Maria : Had a query regarding L/C which is one of the payment methods. Can you please explain how this works step by step and how to ensure that we receive payment on time.

Aamir Hasan : Can you please help me. Actually i want to know that how to release GR after receive the complete payment, can you please send me covering letter of GR documents?

Hardik Sheth : I want to start my own Export/Import business. But I am still very confused about selecting the product to start a business with. As it will be my first experience, I think I should only go for small orders. And also wanted to ask that does this business require a lot of capital? I also don't have any proper platform to start a business. My father is does a job in a small firm. So investment is a big question for me. As I am a 'starter' in this field, I wanted someone to guide me. I was in search of a Guru. And as I am am a big fan of your website, I came to know about you. You have already become my Guru.

laxmikant tukkar : I need LC for import machine, Can you open LC ? If you can open LC

Kamal Kanchan : Would like to know can we open LC within India ( no export/Import business), as I got to know that LC is applicable only for Export/Import business.If it is, please forward me notification stating that LC can open within india, I shall be obliged.

jimmypunesar1: I am going to start my first consignment as a trader. So was a bit confused regarding letter of credit. For instance as I said u that I m a liason agent and I have to trade some quantity of rice In any port in India. So as my exporter has informed me that a letter of credit will be issued by the buyer who is in West Africa and a local LC in India will be issued. Because it is a big amount n the mill owner is asking for a TT transfer and he doesn't know anything about LC. So kindly let me know how to explain the mill owner regarding the local LC which will be opened in his name and how the things will work smoothly. And also kindly advise what precautions I have to take as a liason agent.

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