Understanding the payment terms for commercial shipping is important when it involves international trade, and when it comes down to payment terms for shipping and letter of credit, it should be clearly defined. A Letter of Credit, is an important document used for international trade, issued by a bank as payment guarantee that the buyer’s payment to the seller will be received on time and correctly.
There are three main parties, they include;
- The importer of goods/ the buyer
- The bank / Issuer of the Letter of Credit
- The exporter of the goods / the seller
The issuing bank will guarantee to pay the specific sum upon receipt of the required documentation that specifies the shipping information required (shipping date, insurance, arrival at port, terms of sale, and other shipping conditions agreed upon by two parties). The use of letters of credit is mostly used to establish trust, when conducting trade from different countries to establish creditworthiness to ensure that the buyers good’s will be shipped and the seller’s goods will be paid.
Abbreviated as an “LC”, this document is issued by a bank nominated by the buyer whereby it shows the seller as the beneficiary, and it states that the payment will be guaranteed should the buyer fail to make the payment in full. In the even part of the payment has been made, then the bank will make the balance payment, this too can be arranged. In order for the bank to do the needful, the seller has to ship the cargo, deliver the necessary documentation required for clearance of the cargo for the buyer prior to getting paid. The letter of credit is also known by a few other terms, such as letter of undertaking, documentary credit, as well as letter of guarantee to name a few.
Further, there should be other corresponding documents that the exporter should send to the bank in order to release the payment, which includes the commercial invoice, the packing list, bill of lading, and certificate of origin.