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Using a Letter of Credit
On some occasions a supplier might require a company or an individual to provide guarantee of payment. This is usually where a considerable sum of money is involved, so for instance for the purchase of a car or a home or for stock or plant equipment for a business.
In this case a documented Letter of Credit provides the necessary guarantee and can be obtained by the company or individual's bank. This letter guarantees payment to the supplier on condition that the correct documents (specified in the banks terms and conditions outlined as an accompaniment to the Letter of Credit) are presented.
A Letter of Credit is often used for transacting with those suppliers not easily accessible to the buyer, ie. Sourcing products from an overseas supplier and contains the terms of the contract. These terms must be complied with prior to the bank releasing payment to the supplier. This may include delivery time, quality, payment terms, independent third party testing of goods etc. if a supplier than accepts the Letter of Credit then the bank supply and bank comply with their part of the agreement and the bank then recoups payment from the individual or company seeking the line of credit in the first place.
A Letter of Credit usually places the buyer in a position of greater bargaining power in their trade negotiations when compared to using alternative means of payment. This is because they already have and can show the surety of payment as part of the negotiation process.
