Each payment has its advantages for both parties participating in sales agreement.
There are four types of payments in international trading:
1. Advance payment
2. Documentary collection of payments
3. Documentary letter of credit
4. Payment by open account
Letter of Credit - Advantages
Documentary letter of credit is the only form of payment, which is equally beneficial for both parties due to the equal division of obligations between both parties.
Letter of Credit –Stages
1. The first stage envisages an establishment of cooperation between trade contracting parties. As a rule, a potential buyer presents an agreement on the purchase of certain goods or services to a potential seller, where the payment through documentary letter of credit is provided;
2. Sales Agreement / Contract is signed after discussion of the concrete provisions;
3. A buyer (applicant) provides a bank (Issuing bank) with the agreement, which serves as a basis for elaboration of concrete provisions of letter of credit between the Bank and the seller (beneficiary);
4. After summing up the provisions, a buyer (applicant) orders the issuing bank to open a letter of credit in favor of the seller (beneficiary);
5. An issuing bank sends a letter of credit to the seller’s (beneficiary’s) bank;
6. A seller’s (beneficiary’s) bank issues a letter of credit to the seller;
7. A seller (beneficiary) sends goods to the buyer (applicant);
8. A seller (beneficiary) presents documents required under the letter of credit to the seller/s (beneficiary’s) bank;
9. An issuing bank (could be applicant’s, beneficiary’s or other bank) checks the presented documents and in case of its compliance with the letter of credit, performs the payment to the seller(beneficiary);
10. An issuing bank recovers the paid amount from the applicant (seller) in accordance with pre-agreed provisions in return for documentation;
11. An applicant (seller) receives goods from a person determined under the letter of credit.
Service as well as technical fees for documentary letter are fixed on an individual basis.
