Mitigate risks in international trade deals when:
- The parties to the transaction have new and untested business relations,
- The seller is not sure about the buyer's ability to meet his payment obligations, and the buyer is not sure that the seller is able to deliver the goods,
- Legislative acts of the buyer's or the seller's country stipulate the letters of credit to be the compulsory means of payment in import-export operations,
- Contracts involve large-scale projects or custom- made goods,
- The economic or political situation in the buyer's or seller's country is unstable,
- The seller requests a 100% Letter of Credit instead of an advance payment.
Reduce the following risks in international operations - from the point of view of the seller:
- Production, performance risk: the buyer wishes to cancel or change the order without the consent from the seller,
- Payment risk: the buyer's default or inability to meet its payment obligations,
- Political risk: the political situation in the seller's country jeopardises performance under the contract,
- Payment risk associated with the political situation in the buyer's country: changes in currency exchange regulations restrict payments in certain currencies or to certain countries.
The bank that has issued the Letter of Credit has an obligation to pay, therefore, if credit conform documents are presented to the bank, the bank will effect payment even if the buyer defaults or is unable to meet their payment obligations,
The Letter of Credit allows the seller to be sure that the seller will receive a specified sum of money within a specified period of time if documents in strict compliance with the terms and conditions of the Letter of Credit are presented to the bank,
The seller can better plan his cash flow.
To finance export transactions. If the Letter of Credit envisages a deferred payment (payment within 30 (45, 60...) days after shipment), the bank can pay to the customer the amount of money indicated in the documents, less interest and charges prior to receipt of payment from the bank issuing the Letter of Credit.