"Millions long for immortality who don't know what to do with themselves on a rainy Sunday afternoon."Susan Ertz
|
| |
Credit repair basics
Have you ordered your credit report? Remember by September 1, 2005 every state will be required to allow you to one free credit report each year. If you are denied credit for any reason you are entitled a free credit report. Under any other circumstances ...
Getting Out and Staying Out of Credit Card Debt
Credit card debt is a major cause of over one million bankruptcies each year. The reason is that many people get a credit card without researching and reading the fine print. By the time annual fees are added on, along with spending indiscriminately, ...
Unsecured Loans for the People With a Bad Credit History
There are many borrowers who have a bad credit history. You may acquire a bad credit score as a result of default, late payment, insolvency, etc. We have seen a huge expansion of the UK loan market. More and more Britons are now taking out loans. A loan ...
|
|
|
| |
A letter of credit is a financial tool that streamlines the process of doing business both nationally and internationally. It provides a guaranteed (usually) form of payment to your suppliers while limiting your risks in the transaction. To better understand letters of credit, let's look at an example.
Let's say that you own a widget distribution company. Let's also say that your good customer provides you with a very large purchase order for widgets. Since you distribute (rather than manufacture) widgets, you'll need to place an order with your widget supplier to be able to fulfill the order. In this case, you want to use a new widget supplier that is located in Asia and does not know much about your company.
Your first step is to try to buy widgets from your Asian supplier. Now you have an interesting situation. Your supplier is very likely to ask for cash up front or some guaranteed form of payment before manufacturing and delivering the widgets. You, on the other hand, will want to pay upon receipt, or better yet, ask for 30-day payment terms (meaning, you pay 30 days after receipt). As you can see, both parties are trying to limit their risk.
To solve this situation you can go to the bank and ask them to create a letter of credit for this transaction. The letter of credit stipulates that your supplier will be paid by the bank, if they comply with the terms of the L/C. Usually, to comply with a letter of credit, documentary evidence that proves delivery of a quality product per the agreement needs to be provided.
Now your supplier can go ahead and deliver the widgets, knowing that he will be paid if he delivers according to the agreement.
As you can see, this protects your supplier, and the letter of credit also protects you, because it ensures that the supplier is paid only if he complies with the agreement. Although letters of credit come in a number of flavors, in general they tend to guarantee payment by the issuing bank, which gives suppliers a level of comfort.
Of course, once funds are paid to your supplier you will need to pay the bank. Usually, banks will ask that you have a line of credit (or similar financing) so that they can satisfy payment for the LC from that account. Unfortunately, this also means that to qualify for a letter of credit you almost always need to qualify for traditional bank financing. This is not easy for new, small or growing businesses. If you cannot qualify for a letter of credit, your best alternative is to secure trade financing use purchase order financing.
|
|
|
|
|
|
|
