Letter of Credit is a good method for trading goods

There are many methods of payment for purchasing goods from one country to another country and within the country. Advance payment, open account, consignment and collection basis but out of them the most powerful, popular, convenient and reliable method of performing trade is through the medium of Letter of Credit.   

In modern trade, goods are represented by documents which are exchanged for cash or some kind of promises to pay against the product. In the international trade there exists mistrust between two parties. Both parties will be uncertain. The buyer will be uncertain about what he/she is buying and what he/she is getting for selling. 

The seller may be uncertain on whether he will be paid in full and in time despite having dispatched genuine goods. Consequently banks have involved themselves as a facilitator between the commercial parties engaged in international trade. The undertakings established by banks for international export and import in accordance to the instructions of commercial parties are known as Letter of Credit. In the broad sense a letter of credit is a letter of instructions issued to the exporter by a bank at the request of its customer. It is a specialized and technical instrument used as financial shipment of good from one party to another. Letter of credit guarantees payment to seller on the simple condition that he/she presents the correct documents and does so independently of the underlying contract of sale or the financial condition of the buyer at the time of presentation. All the financial risk is passed to the issuing bank and this security for the seller is the fundamental purpose of letter of credit. 

Letter of credit entirely removes the necessity of the seller to trust the buyer for payment. The seller is sure of payment and buyer is sure of receiving the correct document. There are some purposes of LC; LC acts as an instrument for financing the purchase of foreign goods and equipment assists issuing bank to grant finance to the importer and monitor its use, LC brings confidence and security for commercial parties involved and it enables exporters to secure payments provided the clauses and conditions are not complicated.