Letter of Credit, often abbreviated as L/C is a letter from a financial institution normally a bank assuring that correct payment from buyer has been received on time. In case of Japanese used cars it is a document or a written commitment by a bank of a buyer or importer assuring payment to the seller or exporter of used cars provided certain concrete documents are presented to bank by the exporter.
The documents should prove that the exporter has performed his duties under a precisely-defined contract and the car or vehicle has been supplied as agreed within fixed time frame. In return for these documents, the beneficiary or exporter receives payment of specified sum in specified currency from the financial institution normally a bank that issued the letter of credit. The letter of credit can also be used to ensure that the quality of used cars or other automobiles are met by the supplier, provided that these requirements are mentioned in the documents described in the letter of credit.
The exporter generally presented to the bank by the exporter includes original Bill of Lading or Air waybill, commercial or purchase invoice, certificate of origin, insurance certificate, packing list etc. L/C is used for the larger quantity order shipped by sea. A typical L/C payment scenario takes 14-21 days to complete.
Following details are included in a letter of credit:
- Applicant (buyer or importer)
- Applicant (buyer or importer)
- Opening bank
- Negotiating bank
- Specification and quantity of the goods
- Amount of money
- Loading port and destination port
- Shipment date
- Validity date of the L/C
- Terms and conditions agreed by both the importer and exporter
- Documents required by the importer
The L/C serves as a guarantee to the used car exporters that even if the buyer fails to pay, the exporter will get the payment. In this way, the risk that the buyer will fail to pay is transferred from the exporter to the financial institution who issued letter of credit.
The Letter of Credit payment procedure is usually as follows:
- Importer applies to open the L/C to the seller through a bank who can open the L/C in his country.
- The opening bank or the issuing bank creates the letter of credit and will inform the negotiating bank that the L/C has been opened; also it takes the responsibility to make the payment on behalf of the Buyer on receiving the documents from the exporter.
- The negotiating bank will inform exporter that the L/C has been established.
- Exporter will check all the terms and conditions listed in the L/C. If all terms and conditions are acceptable, exporter will arrange the shipment within the time specified in the L/C.
- The captain will issue the Bill of Lading to the exporter, once the goods are loaded onto the ship without any damage.
- Exporter will submit the BoL and other documents to the negotiating bank to collect the payment. Only with Bill of Lading, one can claim the ownership of the goods.
- The negotiating bank will send the clean Bill of Lading and relevant documents to opening bank.
- The opening bank will inform importer that all documents are received.
- To get Bill of Lading and other necessary documents, used vehicle importer should make all the necessary payment.
- With all the relevant documents, importer can clear the Customs smoothly and pick up the goods after they arrive at the destination sea port.
A Letter of Credit is basically a promise to pay. During International or Domestic trade, bank act as an uninterested party between the buyer and the seller and guarantees that a payment will be met if certain criteria is fulfilled. There is no payment method that is perfectly safe to both the importer and exporter at the same time as compared to Letter of credit.