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Using a Letter of Credit in International Shipping

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Using a Letter of Credit in International Shipping
Those people who are starting out in international trade business, or some who have been in a long time, find it difficult to trust foreign companies. They still want to be in business and they need a sure way to know they do not get scammed. This is where a letter of credit comes in. Letter of credit is a legal document designated to keep a clean smooth transaction whereby each side agrees on the exact way that all parts of the shipment will run. Usually, it starts from the very beginning of the process before the product is shipped and closes once the goods are received. While this sounds like a wonderful safeguard for protecting your shipment, it can also make it more difficult and create delays in the international shipment. In a letter of credit, a bank will only pay based on the rules in the letter of credit. Everything must be exact including the shipping costs, the steamship line being used, the logistics companies and any costs involved. So if there are any changes along the lines, the payment will only be made according to the agreement. This may leave a shipper facing delays in receiving goods and there could be additional costs or other challenges that normally the supplier would be responsible for. This is the biggest drawback of a letter of credit. In many situations it can make sense to use a letter of credit especially in the beginning of your relationship, but at some point you may find it much easier to trust your agent and vendors to make the shipment run through smoothly and quickly.

Types of Letter of Credit (LC):
1. Irrevocable Letter of Credit
2. Revocable Letter of Credit
3. Confirmed Letter of Credit
4. Anticipatory Letter of Credit
5. Transferable Letter of Credit
6. Back-to-back Letter of Credit
7. Revolving Letter of Credit
8. Stand-by or Backup Letter of Credit
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