Letter of Credit for companies who want conditional bank guarantee, at Garanti.
A letter of credit is a bank obligation which states that if documents showing that goods have been loaded or services have been performed are presented within a specified period of time, a designated sum of money will be paid to the seller of the good or service. In short, a letter of credit is a conditional bank guarantee.
In international trade, it is quite common for the parties not to know one another very well and there may also be unknown incompatibilities in different countries' currency-control and foreign trade regimes which creates uncertainties and risks for both sides. The seller wants to ensure the collection of receivables, while the buyer wants to ensure that the goods or services are delivered on time. If the seller does not abide by the terms of the letter of credit, the bank, under no circumstances, makes any payments. This is an assurance factor for the buyer. Therefore, the letter of credit a widely used payment method in international trade, providing a high level of assurance for both sides.
Advantages for the Buyer
- The bank will not make any payments to the seller, unless the terms of the letter of credit are fulfilled. This is an assurance for the buyer.
- It ensure that the goods and services are delivered exactly as stipulated in the sale agreement.
Advantages for the Seller
- The seller is assured payment the moment the required documents are presented to the bank.
- It provides convenient financing for the seller.
A bank issuing a letter of credit irrevocably pledges to make payment if the goods are shipped and their documents conform to the terms of the letter of credit and the rules of international trade.
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