The Good And Bad About Letters Of Credit

Article Written By: WadeHenderson

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. For the exporter, another advantage of LC is the fact that the exchange rates would remain the same as the ones shown in the original LC. Banks are more likely to have accurate information on exchange rates than the importing companies that you work with.

Through the use of LC, a business is more likely to keep the same exchange rates in the course of transactions regardless of the changes that countries do in their currencies. It is not in the best interest of local governments to show the world that the LC are not valid because there were changes in currency.

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.andnbsp; The importers also see the benefits from the use of LC because they do not need to pay for the merchandise only when the documents arrive to a port or local airport.andnbsp; The main advantage of a LC to the importer is that this fund should not pay until the documents arrive at a port or local airport and until they have satisfied all conditions in the credit.

Some of the disadvantages of LC are:

The main disadvantage of LC for importers is the high prices of that the issuing banks establish. Having one may reduce the possibility of a business to obtain lines of credits.andnbsp; 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.

Exposure to movements in the exchange rate: Fluctuations in exchange rates may affect the demand of the product of a foreign company, when the currency strengthens national product denominated in that currency become more expensive for foreign customers, which may cause a decrease in demand and therefore a decline in inflows of cash.

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.

LC would provide some stability but provide little guarantees when it comes to political and economic decisions of foreign governments.

About the Author

Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Commercial Credit LC

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