My Full Name: Trần Việt Đức

ID Student: 1911110090

ESSAY 2

In the business world, both sides of the transaction and contract of purchase and sale
of goods, it follows that on against opposite side promise to deliver goods or provide a
service and or receipt of funds have been the guarantee of sufficient financial and credit.
Collected this conflict of interest is in the form of letters of credit and special banking
mechanisms.
Currently, the most common and most important method of payment in business
transactions is letters of credit practices that have special rules and known uniform
regulations as UCP600 letters of credit. Letters of credit is commitment that assumes
opening bank credit in return for obtaining certain documents requested by the applicant
credit pay demands of interest credit or the seller.
The letter of credit considers the most secure payment method for both consignees
and consignors in international trade. Importance of Letter of Credit-LC is highly
recognized due to factors like unknown business partners, different law governing in
different countries, and the distance between business partners are major reasons for the
letter of credit to pays a crucial role in trade.
Safely Expand Business Internationally and highly customizable. A letter of credit
gives the trade partners an ability to transact with unknown partners or in newly established
trade relationships. It helps in expanding their business quickly into new geographies.
Besides, a letter of credit is highly customizable. Both the trading partners can put in terms
and conditions as per their requirements and arrive at a mutual list of clauses. It can also be
customized from one transaction to another with the same trading partners.
Seller Receives Money on Fulfilling Terms. A letter of credit makes the issuing bank
independent of the trading partners’ obligations and any disputes arising out of those
obligations. The bank has to just check whether the documents submitted by the beneficiary
satisfy the terms and conditions specified in the letter of credit, and pay the full amount.
 Works as a Credit Certificate for Buyer. A letter of credit transfers the credit-
worthiness from the importer or buyer to the issuing bank. The importer can do multiple
transactions at the same time when he is backed by an established and larger institution
such as a bank.
Seller is Free of Credit Risk. A letter of credit is safer for the seller or exporter in
case the buyer or importer goes bankrupt. Since the creditworthiness of the importer is
transferred to the issuing bank, it is the bank’s obligation to pay the amount as agreed in
the letter of credit. Thus, a letter of credit insulates the exporter from the importer’s business
risk.
Quick to Execute for Creditworthy Parties. A letter of credit is quick to execute. As
per the initial terms and conditions, the seller or exporter has to present the proof of material
type and quantity along with the shipping documents supporting his claim that the goods
have been shipped. The advising bank will verify the documents and give the full payment.
Payment Assured in Disputable Transactions. In the case of a dispute between the
trading partners, the exporter can withdraw the fund as agreed upon in the letter of credit
and resolve the disputes later in the court. The beneficiary’s right to the full amount is
described in the phrase ‘pay now, litigate later’ by the courts. The importer cannot hold or
deny the payment to the exporter by raising objections on the quality of goods because the
bank just needs to see the documents satisfying the shipping terms and conditions as put in
the letter of credit.
The importance of Documentary Letters of Credit as a method of payment in
international trade which can balance conflicting interests of exporter and importer by
transferring the payment risk from the importer to the issuing bank is constantly growing
due to constant development in trade among nations.