Question

A letter of credit reconciles the conflicting interests of buyer and seller in an export contract.Explain the mechanism of letter of credit

Answer 1

Answer:

A letter of credit is a legal binding letter from a bank  that offers guarantee that a buyer's payment to a seller will be received on time and of the full amount therefore it reconciles the conflicting interests in an export contract between a seller and a buyer. It is also called a bankers commercial credit.

Explanation:

A letter of credit is makes the bank act as a guarantor for the buyer in that on the event the buyer does not make the necessary payments to the seller on time the bank will be required to cover the remaining or the full amount because in the letter of credit the bank acknowledges that the money require will be raised on time .

In the case of a shipping the and requires information such as; the amount of payment, name and address of the seller, day of shipping, means of shipping, destination of the shipment among many other details in order to offer a letter of credit.

In order to be offered a letter of credit by the bank, the buyer will have to deposit funds to the bank or acquire a loan from the bank to pay the seller.

If everything is acceptable to the seller including trusting the issuing bank, they may go ahead to produce and export goods.