We have all heard more than once that a stable developed economic system is primarily characterized by a stable banking sector. That is why the governments of almost all countries with developed market economies contribute in every way to the development of the banking system of their country. That is why all registered legal entities engaged in one or another type of economic activity are required to have a current bank account for settlements with organizations, enterprises, private entrepreneurs, financial institutions, the budget and extra-budgetary funds. Hence the popularity of cashless payments through a bank, among which the letter of credit form of payment stands out.
World banking practice and local laws of most countries, including the Russian Federation, distinguish the following forms of documents for cashless payments:
- settlements under a letter of credit;
- collection orders ;
- bills;
- checks
- money orders.
The simplest and most familiar form of payment for many enterprises and companies is the most common payment order. It is this method that is most often used in carrying out activities on the territory of one state. However, if you start working with foreign clients, this form ceases to suit you, and the letter of credit form of payments comes to mind.
When entering foreign markets, such a criterion as simplicity is already less attractive in comparison with legal reliability and financial security. Although in foreign economic transactions (export-import) both settlements on a letter of credit and collection are widely used, the letter of credit still best meets these criteria. This calculation is also popular because reliable foreign firms prefer to work on the terms of payment under a letter of credit.
Nevertheless, many legal entities do not decide on this form of payment, considering it rather complicated and expensive. However, you always have to pay for protection against risks, and for the sake of the benefits provided by a letter of credit, such as 100% payment for the goods sold and 100% compliance with all conditions and terms of the contract by both parties, you should study it.
A letter of credit is a form of cashless payment, which is completely carried out under the control of banks according to the following scheme:
- Having concluded a contract, the seller, before shipment of the goods, requires the buyer to open a letter of credit in his name. The buyer fulfills this requirement through his bank.
- The bank with which the buyer cooperates opens a letter of credit (a bank account in another bank, usually in the bank where the seller is served) and transfers the amount to the seller, but not to the current account, but to the letter of credit. This money is not available to the seller until you receive the goods.
- The bank opens a letter of credit. This is notified to the seller. Only after he made sure that the payment has been transferred to the letter of credit, the goods are delivered to the buyer, and the accompanying documents are transferred to the bank, which cooperates with the seller.
- This bank sends documents to the buyer's bank to verify that they comply with the terms of the letter of credit.
- Funds for the goods sold are transferred to the seller’s current account , documents for the goods are transferred to the buyer. Only after that he has the opportunity to receive goods and dispose of them.
The letter of credit settlement suits both the seller (the bank receives money for the goods in advance, before the goods are dispatched) and the buyer (money is transferred only with full observance of the contract).
The letter of credit of settlements is carried out according to the rules, among which the most important, such as mandatory details and deadlines, are noted. These and other conditions for the circulation of letters of credit are always determined and regulated by the National Bank of the state. In Russia, these rules can be found by studying the Regulation on cashless payments.