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Lessons on Letters of Credit
I'm back again with insights on FCIB's International Credit & Risk Management (ICRM) course. I just wrapped up module 7 on global payment mechanisms and started module 8 on letters of credit, guarantees and bonds.I learned that letters of credit (LCs) are one of the most versatile and secure payment instruments to use in international sales. They are a form of documentary collections that offer both parties more protection than documents against payment (DP) or documents against acceptance (DA).
I also learned that they are one of the most misunderstood payment mechanisms. Some people mistakenly feel they are irrevocable guarantees of payment by the bank when they're not. A letter of credit is a bank-to-bank commitment to make payment provided all the documentary conditions are met exactly as they are specified.
Some companies and credit professionals avoid LCs because they feel they are too labor intensive or too expensive, "but they do offer the benefit of additional protection against default of nonpayment by the customer," said ICRM Instructor, Val Venable, CCE, CICP, ICCE in the introductory recording of the module. "Letters of credit are also a toll that sellers can use to make their receivable portfolio more attractive to their lenders and credit insurers."
Considering this is just the introduction, I'm already learning more about what agreements international creditors make to secure payments. I'm also able to see the advantages and disadvantages of each agreement.
Until next time,
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