A letter of credit is a financial transaction, within the framework ofto which the payer is given an order to the beneficiary's bank. Bank manipulation is carried out on the initiative of clients, on their behalf in accordance with the partnership agreement. The instruction consists in carrying out payments by an individual or a legal entity within the framework of the specified conditions under the order.
Having studied the concept and types of letters of credit, we will stopon the fact that this format of mutual settlements through the bank has both positive aspects and its shortcomings. The letter of credit can be called a conditional monetary obligation, which is accepted by the bank at the instruction of the applicant, in accordance with which the financial institution assumes the responsibility to pay the beneficiary towards the amount indicated in the documents. This determines the high level of security and guarantees that neither side will be deceived. You can describe the situation easier. For example, one firm wants to buy from another certain product, but because of the risk does not want to pay it immediately. In this situation, the buyer asks the bank to pay for the goods for him, giving him a receipt that the payment will occur later, upon receipt of the goods. The bank transfers a certain amount of money to the seller, and then, on the basis of a receipt, collects funds from the buyer. Settlements with the bank and between the parties in this format are known as settlements by letters of credit. Types of letters of credit define certain subtleties of partnership between the four parties.
When forming a partnership betweenentrepreneur and organization, as well as between private individuals and entrepreneurs, there is a high risk of losing money or goods at the conclusion of a contract or in mutual settlements. The types of letters of credit presented in the banking sector make it possible to avoid significant losses when carrying out transactions for large amounts. Minimization of risks is due to the fact that any financial process under the letter of credit is implemented under strict control simultaneously by the two banks. Failure to comply with the terms of the contract with each of the parties is completely excluded. The supplier of the products, in fact, as well as its buyer, simply can not fail to fulfill their obligations in the framework of the partnership.
When using letters of credit in carrying outit is extremely important to choose the appropriate type of transaction. The latter is opened by the bank only at the direction of the payer, and therefore the choice with regard to the format of the operation remains with the payer. Information on the alleged subtype of banking transactions is entered into the contract. In accordance with the standards of the CBR, it is customary to allocate the following types of letters of credit:
Deposited and guaranteed transactions are the most common calculations by letters of credit. Types of letters of credit define the specification of the transactions themselves.
A confirmed letter of credit, whose types can bediffer depending on the specifications of the transactions (revocable and irrevocable), is a letter of credit, in which the executive financial institution assumes obligations in making the payment regardless of the fact of transfer of money from the bank where the confirming letter of credit was issued. The order of coordination of the nuances for the operation is determined by interbank agreements. The answer to the question of which combination of types of letter of credit is impossible is hidden in the above definition. Other tandems are simply unacceptable.
Not less demanded in the conduct of mutual settlements is considered to be both revocable and irrevocable letter of credit. Types of letters of credit of this category also have their own specifics.
The recipient of funds for a banking transaction hasthe right to refuse payment, but until the expiration of its validity period and provided that this nuance is stipulated in the contract. Allowed by prior arrangement and acceptance of a third party, which is authorized by the payer.
Allocate not only the main types of letters of credit, but also their varieties. You can mention the following modifications of the banking transaction:
When concluding contracts in contracts is mandatoryindicates the form of mutual settlements, as well as the features of the delivery of goods or a scheme for the provision of services. Mandatory types of letters of credit and their characteristics are prescribed in the papers. To avoid problems, the paper must contain the following information:
In order for the partnership to be successful,the payer must independently or with the help of a specialist study this format of banking operations, focusing on who uses what kinds. Letters of credit differ depending on the format of mutual settlements. For the specific case, you need to choose the optimal format for the partnership. It is worth saying that in the event of a violation of the format of settlements, all responsibility is assigned to financial institutions in accordance with the law. This is determined by the fact that representatives of financial institutions are particularly attentive to the verification of documentation, which confirms the delivery of goods, the performance of a certain amount of work or the provision of services.
For this type of non-cash payment,and the pros and cons. The positive aspects of the partnership include the presence of a 100 percent guarantee of payment to the seller of the goods or a representative of services. Control over the implementation of mutual settlements under the transaction is realized by the financial institutions themselves, which excludes the risk of fraud and the proper fulfillment of their obligations by each of the parties. When carrying out a banking transaction, due to a delay in payment, the buyer does not withdraw part of the capital from the economic turnover. Payment for goods or services is carried out as if in installments. At the time of signing the contract of funds in the hands of the buyer may not be. The same moment is also a disadvantage, but for the seller of goods and a representative of services. They receive money with a delay. It is worth mentioning that the scheme of partnership on a letter of credit is very complicated, it will not be possible to understand it at once. However, the world practice shows that businessmen who once used the offer, never use any other payment formats. The advantage in terms of high security indicators completely covers the complex scheme of document circulation and relatively high commissions of banks.