What you mean by Letter of Credit Eligibility Criteria?
Letter of credit is a guarantee made by banks or financial institutions in favour of the buyer that payment will be done on time without any default, if due to any reason the buyer fails to make payment, then bank take the responsibility to do so. Hence, Bank cover-up the sum amount as mentioned in agreement. Typically, LC is often used by international trader to build confidence in transactions. Before applying for LC check your eligibility criteria as given below: -
Letter of Credit Eligibility Criteria
Letter of Credit Eligibility Criteria depends on various factors like age of individual,
repayment history, business sales/turnover, total work experience &
- • Applicant age should be above 24 & below 65 years
- • Any Company engaged in import & export trading can apply
- • Proper License of import/export trading
- • Applicant must have certificate of origin & inspection
- • Background of promoter should be good in terms of financial track record & repayment history
How Letter of credit process works?
Generally, letter of credit issued by bank it’s a kind of document assuring the buyer that if suppose seller unable to make payment on given time period, then bank will be responsible to make payment on behalf of buyer.LC is obtained against pledging any collateral/security & before issuing LC bank or financial institution charge certain fee based on type of LC acquired & commercial invoices.
There are almost 8 Type of Letter of credit as under given: -
Credit on Sight- Credit on sight is significantly used by beneficiaries to get paid for exported goods by submitting relevant documents to concerned banks. It is known to be the best way to get an instant letter of credit.
Standby Letter of Credit- Standby Letter of Credit (SBLC) allows an importer to get payment in foreign currency just by providing issuance of SBLC to international bank.
Back-to-Back LC- It's referred as negotiable instrument. Where buyer initiates LC in favour of seller with mentioning intermediary broker, once issued LC by buyer immediately shared to intermediary broker then they quote the request to share the same with seller, this is how a back-to-back LC works.
Confirmed LC- Generally, it happens in rare scenarios when seller is unsatisfied with buyer creditworthiness even with the issuing bank & left with the ideal option to get confirmed LC by secondary bank.
Unconfirmed LC- Unconfirmed LC is one such LC which gives is confirmed from issuing bank only, wherein no other bank gives confirmation or guarantee to the beneficiary for payment.
Transferable Credit- This type of LC is especially stated as transferable credit, it won’t allow second beneficiaries to transfer with third beneficiaries as per certain norms.
Revocable LC- Revocable LC is known to be unsafe LC for exporter as it consists high risk, have the chances of cancelling LC without prior information shared to the beneficiary at any time by issuing bank.
Irrevocable LC- Both the importer & exporter is totally stress relaxed due to the presence of Irrevocable LC, exporter is well confirmed about his/her payment surety & at the same time importer get exact goods with respective quality plus quantity as stated in agreement terms.
How to issue Letter of credit?
LC is mostly preferred by international traders to build transaction confidentiality, no matter which sector you belong to whether it’s textile, manufacturing, automobiles like much more.
Step 1- Buyer quote request to issuing bank to get letter of credit in favor of exporter.
Step 2-After getting letter of credit application form buyers need to fill in the form with correct value with attach supporting documents to get verified by issuing bank. Note: - Collateral is required to get letter of credit.
Step 3- Once, the issuing bank check application & attached documents then evaluate the collateral meet certain requirements to fulfill contract amount.
Step 4- If all seems good, then only issuing bank initiate charge fee for issuing LC that is totally based on commercial invoice & chosen type of LC.
Step 5- The overall process comes to an end with issuing bank issue the letter of credit & share to the importer for approval, once the importer gets satisfied with terms of agreement then finally letters of credit draft get finalized.