Importance of Letter of Credit (LC)
1. Risk Mitigation: LCs helps in reducing risks for buyers and sellers equally.
2. Facilitation of International Trade: By offering a standard and safe payment option, LCs promote international trade.
3. Seller Security: LCs offer sellers a high degree of payment security, particularly when working with new buyers or in areas with erratic political or economic situations. They guarantee sellers that they will be paid as long as they stick to the provisions of the LC.
4. Payment Guarantee for Buyers: Buyers are guaranteed not to receive payment until the seller satisfies the certain requirements stated in the LC.
5. Reduced Currency Risk: As LCs can be issued in multiple currencies, buyers and sellers may negotiate for the one that best fits their needs.
6. Trust in Cross-Border Transactions: LCs promote trust in global trade by motivating companies to do cross-border transactions that they otherwise might not have done in the absence of this safe payment method.
7. Verification of Documents and Compliance: These processes aid in making sure that the right products or services are provided, meeting quality standards as well as all regulatory and legal responsibilities are fulfilled.