Here is a brief introduction of L/c:
A Letter of Credit should be China importers most used international trade payment term. By opening a Letter of Credit it promises payment, provided the seller complies with the terms and conditions inside the Letter of Credit. The Irrevocable letter of credit can't be canceled or varied without the approval of both parties. This type of L/c, is the most common and preferred one, in China.
A bank issues a letter of credit (L/c) on the behalf of buyer or importer under the following conditions:
a) When an importer is importing items to its own country.
b) Any purchasing, where products from the country is sold to another commercially.
c) When an exporter from China is executing a contract outside his own country, importing items from a third country to sell to the second party.
These 3, are the basic, to obtain a letter of credit in present day of trading.
There are certain charges and payments, related with this sort of trading terms. The issuing bank charges the applicant costs, for opening a letter of credit.
The fee depends on the credit of the applicant, and primarily consists of:
A) Opening Charges: This comprises of promise and procedure charges for the time of the letter of credit.
B) Retirement Charges: This is to be remunerated when the time of letter of credit ends. The bank offering the letter, analyzes the bill according to UCPDC (Uniform Customs and Practice for Documentary Credits), and tax charges based on cost of goods.
There are some risks also, that are connected opening this kind of account:
• Basic risks : Financial position of the Importer, the products involved the exporter, national and foreign exchange risk.
• Quotation can be another important risk factor, related with all forms of international trade. All banks evaluate their risks on the above mentioned criterias, before issuing a letter of credit.