Is Letter of Credit LC safe for an Importer?

As we know, Letter of Credit is operated based on the guidelines governed by the rules and regulations of UCPDC 600 (Uniform Customs and Practice for Documentary credit 600 which came in to effect as on July 1, 2007. In a letter of credit, the buyer’s bank guarantees payment of proceeds to the seller through his bank against Is Letter of Credit LC safe for an Importer presentation of documents as per the terms and conditions of Letter of Credit.

We have discussed about the safety of letter of credit for an exporter point of view in same web blog. Now let us discuss whether Letter of credit is useful for an importer. Is there any disadvantage for an importer to go ahead with letter of credit against his purchase from supplier?

Letter of credit is commonly accepted by both buyer and seller for their business transactions worldwide. Since the importer and exporter situates far away from their work place, Letter of Credit bridges gap between buyer and seller not only on credit risk but also to minimize time, settling dispute apart from credit worthiness of buyer. The major advantage of a letter of credit is that it provides security to both seller and buyer.

Under LC, payments are made against documents. The quality, contents and quantity of goods are immaterial. Inspection agency can be appointed for quality, quantity and supervision of stuffing also with reliable inspection agencies and based on their cortication. Bank deals with documents and not with goods, service or performance.

Once opened a confirmed and irrevocable letter of credit, the importer/buyer already tied up with the said business credit line and can not change in between. Due to various reasons, especially on selling price variation, if buyer needs to stop his export order he can not do so.

Compared to other payment mode of transactions, cost of operating letter of credit procedures and formalities are more, which may be an additional expenses to an importer especially on amendment, negotiation etc.

Currency fluctuation is another disadvantage of Letter of credit. Normally buyer/importer places purchase orders once in a year and opens letter of credit accordingly. The exchange rate may differ at the time of effecting payment. So, if any loss due to fluctuations in foreign currency contracted under letter of credit, need to be beard by him. This is also one of the major demerits of LC.

Currency fluctuations may also effect on price variation in local market. The demand of imported goods may reduce due to such fluctuation of foreign currency. So currency fluctuation also is a threat under letter of credit which is treated as other disadvantages of letter of credit.