Disadvantages of Letter of credit (LC) for Exporter

Posted on 10 April 2023 Category : Export

The information provided here is part of Import Export course online

Dis advantages of Letter of Credit to Exporter

Is there any disadvantages of Letter of Credit for an exporter, as most of business world prefer LC as safe mode of payment. If any demerits on operation of LC, what are they?. Is Letter of Credit safe mode of payment for an exporter?

While accepting a letter of credit, the exporter guarantees to meet the requirem ents of buyer as mutually agreed as per the terms and conditions mentioned in letter of credit. So the liability of meeting all required parameters are with supplier failing which bank may not accept documents under such transaction. Bank may debit certain charges against the discrepancy of documents also if proper documentary proof has not been submitted along with other shipping documents. So, if the exporter does not follow strictly with the terms and conditions of letter of credit with 100% compliance of documentation, the payment will not be effected by bank.

Under letter of credit opening procedures, there are certain bank charges and other costs. If buyer insists seller to pay such costs, the said charges will be additional expenses for the supplier.

If exporter is aware that the credit worthiness of buyer is favorable and sound, he does not need to open a letter of credit to transact with such buyers. However, he agrees on opening LC based on the requirements of buyer to enjoy the advantage of opening LC by buyer. In such cases, meeting of all terms and conditions under letter of credit is the major responsibility of exporter. Apart from meeting additional documentation procedures, exporter needs to spend additional expenses also.

As I have mentioned in other articles in the same website, an exporter must verify the authenticity of opening bank. The Letter of Credit opening bank should be a prime banker. I have experienced many cases of fraudulent LC opening bank who were not a prime banker who does not have proper ‘stand’ to follow the guidelines of uniform customs and practice of documentary credit. So the strength and stability of LC issuing bank is a prime factor while discussing about the demerits of Letter of Credit.

Policy of a country may effect the business transaction between countries. If a cold ware is being continued between two countries, due to political reason, the trade bilateral agreement between such countries may become void, resulting to effect the guidelines of uniform customs and practice of documentary credit. This is another demerit of LC for a seller.
A best caliber of personnel is required to monitor and navigate the process of letter of credit to provide no room for even minute discrepancy of documents.

Compared to other modes of payment, the expenses for opening, negotiating and other procedures of letter of credit is high. This is another disadvantage of Letter of credit for an exporter. This is another disadvantage of letter of credit for an exporter.

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 shipping goods, from the time of opening LC. The exporter receives payment after shipment. 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 to procure raw materials for the buyer/exporter, resulting hike of cost of production in turn the exporter/seller can not hike the selling price, as the purchase order agreement already signed by accepting letter of credit for whole shipments under one LC. 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? Are there any disadvantages to importer for a consignment under Letter of Credit? 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.

Do you have different thoughts on disadvantages of letter of Credit to an exporter? Share below your comments.

The above information is a part of Online Export Import course

Disadvantages of LC (letter of Credit) to Importer.

Advantages of LC - letter of credit – to Importers.

Advantages of Letter of Credit (LC) for exporters

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Click here to know HS code of other product/commodity

Service Tax - Click here to read complete notification under Budget 2014

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Comments

PARDEEP: On 27 August 2013 dear sir, very usefull information is given on this website, truly it is very helpfull for us. there is no other platform where we can get the information about exports import what we can get from this web site. thanks

Nishant: On 06 September 2013 Hi, Your website is a good tool for anybody who aims at understanding international business. However, it would be better if you arrange the things into step wise format. Like, if somebody wants to understand the export process, so it gets difficult to understand that by reading random articles. Hope you got the point. Thanks!

P C Shanmugam: On 02 December 2013 Excellent Explanations for Export / Import term. Am really appreciated your team & website designer.

Md.Mahmudur Rahman: On 29 December 2013 Dear Sir Thanks a lot. Really I am very glad to collect your useful information. I have tried several times before to get the real information about LC. But I became unable to collect that. Excellent , a great job.

majid: On 11 January 2014 what is an open account trade. Document submitted through OUTWARD FOREIGN BILL FOR COLLECTION (OFDBC) won't required to be in accordance with LC terms in this case?

Amit Gupta: On 12 January 2014 Your website is wonderful for the beginners.It gives insights into the basic terms used in international trade which are hard for a beginner to understand.Everything written is well researched,thanks a loads for being a guiding light.

Sendhil Alagendran: On 20 February 2014 your in depth details are really very helpful for beginners. Hats Off to you sir.

Bilal Bin Jarrar : On 06 March 2014 very good efforts initial to high level information regarding Import / Export

SANJAY LOHAR: On 14 July 2014 Dear Sir, Thank you for your Detailed information regarding LC. As I am newly started export business, and i don't no the procedures of LC. Once again thanks a lot.... sanjay

Vinkal Bansal: On 14 September 2014 Excellent Job. such an easy language to clear all doubts. Very Useful website. Thanks and keep posting new changes. Vinkal Bansal

Muthu M: On 20 November 2014 My Opinion:- We received LC From Buyer ... we can cover Forward Contract That Date .. Example:- We book the Order 01.10.2014 Sales Go on 01.11.2014 The Fund Return to Account (Bill Collection mode -At Site Basis LC)Approx Amt Received 30.11.2014 So We can covered Premium for 2 Months Through Forward Contract( Safe mode - Minimum Margin We cover this way)Same time USD vs INR Increase Mean we lose.. (my thought is Minimum profit we fixed in Contract Ar rising Time)

R R Padmanabhan: On 22 November 2014 Very useful article, Sir. I thoroughly enjoyed reading it. I would use it in my class as I am trainer on the subject as well. regards R R Padmanabhan

Jaisimha: On 06 February 2015 Thanks for the useful information shared on the website

Sewa Singh setia: On 24 May 2015 I am exporter of footwear under name and style Global Moovers based in Agra I have precured order of shoes under letter of credit and visited ECGC office for the cover ,branch manager and staff has refused to give the cover which was back up by prime bank letter of credit from American bank "JP Morgan chase bank ". I am surprised with the misbehaviour of Agra branch head and staff by not issuing policy and cover on L/C based order, reasons are best known by branch head and staff, probably I was unable to understand theirs expectations from exporter by cash or in kind. Is there any body who can justify and go in detail to find out that the corruption is spreading upto what extent, and can put some efforts to stop/ fire such kind of officials to help genuine business class for their rights.

BIDKAR V.L: On 23 August 2015 As on April 2015 who is authority for Capital goods instalation

Mahesh Kashalkar: On 12 April 2016 One importer from Africa imported goods from India. The importer issued a deferred payment LC from his bank. He sent the LC to a bank arranged by him only to negotiate & pay the exporter at sight as the exporter's bank was not ready to take the credit risk of African bank. When as per the LC terms, the SDF & GR from was to be submitted to the negotiating bank, the Indian exporter's bank did not do so. The negotiating bank was not ready to accept NOC & they returned the documents to the exporter. How can such situation be addressed? Can someone inform as to how ideally such transaction should be handled?

CHAITANYA KUMAR VANAPALLI: On 21 May 2016 Thank u so much sir for providing such a great knowledge about exports and imports key guidelines to whom were ready for going to do international transactions. we hope to collect the amended articles also include as per the scheduled changes occur in the society.

moinkhan: On 21 November 2016 awesome its adorable to find all detail under one platform its really awesome admin for this website thanx for this website

Dheepan R: On 05 February 2018 Hi sir, I'm the begineer of exports business for the all type of vegetables,kindly share with me the filled form of Letter of Irrevocable credit(LC)

Tyrone: On 23 July 2019 I have question, I just got large project from UAE this is first time I am dealing with this company. I am kid of skeptical to take project, payment terms are 45 days. and without put up front % as down payment. Should I do the project or not take the project.

Vaibhav kinger : On 07 December 2019 I am a exporter of spices. I startup a new business. Which type of can I choose?

Hosen: On 06 March 2023 sorry...why back to back LC can't return the import goods...?