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One of the main advantages that LC grants to business owners is the fact that they can be resold to financial institutions. Something that other documents do not allow.
LC provides some guarantees to the businesses when dealing with financial institutions that other documents would fail to do. Especially when we are talking about exporting goods.
Through the use of LC are protected against fluctuations in exchange rates because they are established before hand in the document. Given that LC are handled by banks, they have more accurate information about exchange rates that would importing companies.
If the importing country changes its currency rules in the course of a transaction, it is likely that the government will allow that LC outstanding and are satisfied, for fear of launching their national banks (local) in an international disdain for a job if this LC confirmed by a bank in the country of the exporter.
Depending of what type of LC the exporter has, a company would find it easier to find financing for exports. That is the case of irrevocable LC.
LC also present difficulties to the importers:
Some of the disadvantages of LC are:
The main disadvantages are the fees charged by the importer's bank for issuing LC and the possibility that the letter of credit reduces the credit line to borrow from your bank.
One of them is the exposure to the changes in currency rates: Companies can be protected against currency fluctuations only to the extent that is specified on the LC. However, there are some fluctuations that would affect the prices of goods within a country and could make them more expensive and on this, LC may not have great influence.
Another risk that multinational corporation are more prone to suffer is the fact that LC may expose them to the economies in a foreign country. Corporations are exposed to the fluctuation of the markets of the countries that they are entering.
Exposure to foreign economies: When multinational corporations entering foreign markets to sell goods demand depends on economic conditions in those markets, therefore the cash flows are subject to economic conditions abroad.
Exposure to political risk: When multinational corporations, establish subsidiaries in other countries are exposed to political risk, which represents political actions taken by the host government or the public that affect the cash flows of multinational corporations. Letters of Credit have advantages, disadvantages and risks. We will call them LC throughout this document.
LC provides some guarantees to the businesses when dealing with financial institutions that other documents would fail to do. Especially when we are talking about exporting goods.
Through the use of LC are protected against fluctuations in exchange rates because they are established before hand in the document. Given that LC are handled by banks, they have more accurate information about exchange rates that would importing companies.
If the importing country changes its currency rules in the course of a transaction, it is likely that the government will allow that LC outstanding and are satisfied, for fear of launching their national banks (local) in an international disdain for a job if this LC confirmed by a bank in the country of the exporter.
Depending of what type of LC the exporter has, a company would find it easier to find financing for exports. That is the case of irrevocable LC.
LC also present difficulties to the importers:
Some of the disadvantages of LC are:
The main disadvantages are the fees charged by the importer's bank for issuing LC and the possibility that the letter of credit reduces the credit line to borrow from your bank.
One of them is the exposure to the changes in currency rates: Companies can be protected against currency fluctuations only to the extent that is specified on the LC. However, there are some fluctuations that would affect the prices of goods within a country and could make them more expensive and on this, LC may not have great influence.
Another risk that multinational corporation are more prone to suffer is the fact that LC may expose them to the economies in a foreign country. Corporations are exposed to the fluctuation of the markets of the countries that they are entering.
Exposure to foreign economies: When multinational corporations entering foreign markets to sell goods demand depends on economic conditions in those markets, therefore the cash flows are subject to economic conditions abroad.
Exposure to political risk: When multinational corporations, establish subsidiaries in other countries are exposed to political risk, which represents political actions taken by the host government or the public that affect the cash flows of multinational corporations. Letters of Credit have advantages, disadvantages and risks. We will call them LC throughout this document.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter of Bank Export Documents Get a totally unique version of this article from our article submission service
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