Characteristics of a Letter of Credit

Applicability

Recommended for use in new or less-established trade relationships when the exporter is satisfied with the creditworthiness of the buyer’s bank.

Risk

Risk is evenly spread between seller and buyer, provided that all terms and conditions are adhered to.

Pros

•Payment made after shipment

•A variety of payment, financing, and risk mitigation options available

Cons

• Complex and labor-intensive process

• Relatively expensive method in terms of transaction costs

Source : http://trade.gov/media/publications/abstract/trade_finance_guide2008desc.html

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