How Does an Import Letter of Credit Work?

For new businesses in the United Arab Emirates, funding new transactions can be a challenge. Along with purchases, small business owners must also worry about paying employees and rent. For this reason, we encourage importers who are still trying to establish themselves to consider utilizing a letter of credit for one or more of their overseas transactions. With an import letter of credit supporting their purchases, importers in the UAE can minimize the risk of buying goods from foreign parties. An import LC will also leave you with more room in your budget to dedicate to other aspects of your business.

But how exactly does an import letter of credit work? What should a small business owner applying for an import LC expect to face throughout the application process? Can Credico Capital simplify the process of securing an import LC and guarantee a successful application? We’ll be answering these questions and more in this article. Here is everything you need to know about obtaining and implementing an import letter of credit.

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Import Letter of Credit

What Is It?

Bank Guarantee / Letter of Guarantee

When an importer wishes to make a purchase but is reluctant to part with cash up front, they may seek out a letter of credit. When used in importing, an LC is issued by the importer’s bank to the person they wish to purchase goods from (exporter). In most cases, it helps to ensure that the seller will receive payment from the bank once they have completed specific terms. These terms will be outlined in the letter of credit and will vary from transaction to transaction. In some cases, an exporter may receive payment immediately after shipping the buyer’s order. In others, an exporter may not receive the payment until their goods have been received and inspected by the importer.

If an exporter is unhappy with the terms outlined in a customer’s letter of credit, they are under no obligation to accept them. Often, an exporter may turn to their advising bank or a trade finance agency for guidance when negotiating a letter of credit. Once all parties have agreed on terms, the LC is made legally binding.

When Should I Use One?

Bank Guarantee / Letter of Guarantee

You should always consider using an import letter of credit while preparing for a foreign transaction. It ensures that you won’t suffer financially should something prevent the goods you ordered from being delivered. An import LC can also help you determine the legitimacy of a seller. If you are skeptical about an exporter’s willingness or ability to deliver the goods they are advertising, asking them to accept a letter of credit to alleviate your suspicions. If they refuse to do so, you can be confident that they are trying to scam you and your business out of money.

Finally, when three parties are involved in an overseas transaction, an import letter of credit can come in handy. If you are the middle man in such a situation, you can trade in the LC from the buyer and use the one issued by your bank. It will help you to convenience the seller of the buyer's ability to make the payment.

What are the Different Types of LC?

Bank Guarantee / Letter of Guarantee

Below, we’ll be discussing the most noteworthy forms of import letter of credit.

  • Commercial Letter of Credit

    A commercial letter of credit is the typical import letter of credit received from a buyer’s bank. It promises to initiate payment on the importer’s behalf once the exporter has met the terms of the document.

  • Revolving Letter of Credit

    The revolving letter of credit is quite similar to a traditional LC. However, it is highly useful for recurring transactions. It allows an importer to make purchases from a particular seller on the strength of a single LC, usually for up to one year.

  • Back to Back Letter of Credit

    The revolving letter of credit is quite similar to a traditional LC. However, it is highly useful for recurring transactions. It allows an importer to make purchases from a particular seller on the strength of a single LC, usually for up to one year.

  • Standby Letter of Credit

    In a standby letter of credit, the importer’s bank promises to send payment on behalf of the importer once the exporter’s product has been shipped or delivered. However, the bank processes the fee only if the importer fails to send payment independently. Because of this, the standby letter of credit is often described as a “last resort.”

How Can I Get An LC?

Bank Guarantee / Letter of Guarantee

When attempting to secure an import letter of credit, it can be useful to consult a trade finance agency. A reputable agency will provide you with valuable insight into the process of obtaining an LC. As one of Dubai’s top trade finance agencies, Credico Capital has long worked with UAE businesses to increase their chances of being approved for LCs. It is done by carefully inspecting the position of each company to determine which, if any, import letter of credit is best for their situation.

Once an appropriate LC has been chosen, Credico Capital guides clients through the nuances of the application process. It markedly increases the likelihood of their LC being granted, allowing the importer’s international trades to move forward without issue.

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