Having the money to do business, without having to work in cash and with a good name behind you is always nice. A Letter of Credit is a written promise by an importers bank to the exporter’s bank that an amount in a specific currency will be paid within a certain time. There are conditions that will have to be adhered to and certain documents need to be forwarded. The documents that are needed are a Clean Bill of Lading, Commercial Invoice and a Certificate of Origin.

The first step for any transaction to take place is for the buyer and seller to make a deal. They will both need to agree on a price as well and quantity and how these goods will be transported. It is normally the seller that will ask the buyer to use a LOC if domestic.

The reason that the buyer will insist on this is so that he will feel more confident that he will actually get paid. Working with a person one does not know can be a risk in itself and at times the buyer will pull out for whatever reason leaving the seller without payment. Sometimes the order can be very large and has the potential to cause financial difficulties if things don’t go according to plan.

Many people might be a bit confused about the Sales Agreement and LOC. These two are not the same as the agreement does not include a financial institution but is only between the buyer and seller. The next step is to obtain the letter from the bank in the buyer’s home country. It is easier if one has already got an account where one is about to apply.

A Foul Bill of Lading is given by the carrier stating that the goods that were received prior to shipping looked damaged and wet and not in good condition. Normally the importers and their banks will not accept these for payment. It is also referred to as an Unclean Bill of Lading.

Factors of production can also be put into two categories. The most important are all stocks and include land, labor and capital that are applied to the manufacturing of products. The less important are all materials and energy because they come from both labor and land.

The Harmonized System code is numbers and names of a certain product. This is generally a numbered code that is comprised of eight digits and in some cases two extra numbers are added. Every product is assigned a number according to the function and form. If one is transporting frozen peas this will be a different classification to fresh peas.

If by some chance the ship carrying the goods never makes it to port, the seller will still get the money as the bank has now made a promise to them that payment will be made no matter what. The Credit Letter is a binding document that no one should try and bypass. It is there for the buyer as well as the seller for their peace of mind.

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