Letter of credit is a way of international trade settlement or payment, so as long as it involves international trade settlement or payment, it will involve letter of credit. Of course, there are other ways of settlement or payment, such as telegraphic transfer and collection.
Whether it is necessary to open a letter of credit every time you import depends on how you negotiate the payment terms with the seller.
As mentioned above, letter of credit is a commonly used settlement or payment method in international trade, which solves the contradiction between the seller's fear of not getting the buyer's payment after delivery and the buyer's fear of not delivering the goods after payment, and ensures that the seller can get the guarantee of payment from the issuing bank after delivery without worrying about the buyer's non-payment; And the buyer doesn't have to worry about the seller's non-delivery-if the buyer doesn't deliver the goods, he can't get the relevant documents stipulated in the letter of credit, and he can't get the payment from the bank, which means that the buyer can't get the payment-this is the main function of the letter of credit to promote trade.
To open a letter of credit, you need to submit a sales contract, and the buyer (applicant) needs to apply to the bank, sign the relevant opening contract with the bank, and pay the opening deposit to the bank. If the applicant has opened a letter of credit or a comprehensive letter of credit in a bank, it can mean paying a certain percentage of the deposit to open a letter of credit. ..
Transactions between domestic enterprises can be settled by domestic letters of credit, which is developed by domestic banks in recent years by introducing the mode of international trade letters of credit to promote domestic trade. However, domestic trade between domestic enterprises cannot be settled in foreign currency, that is, domestic letters of credit can only be settled in RMB.
2. What is the process of opening a letter of credit?
1. Application for opening a letter of credit
After the importer and exporter agree to pay by documentary letter of credit, the importer has the responsibility to open the letter of credit. The first thing is to fill out the application form for opening a letter of credit. This form establishes the legal relationship between the applicant and the issuing bank. Therefore, the application for opening an L/C is the most important document for opening an L/C..
2. Requirements for opening a letter of credit
Uniform customs has clear requirements for letter of credit application, and importers must accurately inform banks.
The instructions for opening a letter of credit must be complete and clear. The applicant must always remember that the documentary credit transaction is a document transaction, not a goods transaction. Bankers are not businessmen, so applicants can't expect bank staff to fully understand the technical terms in every transaction. Even if he writes all the terms in the sales contract into the letter of credit, if the beneficiary really wants to cheat, he can't be completely protected. This requires banks and applicants to work together and use common sense to avoid listing letters of credit that are cumbersome for all parties. Banks should also discourage the use of letters of credit that have been opened in the past when opening letters of credit.
3. The security of opening a letter of credit
After receiving the complete instructions from the applicant, the bank must immediately open the letter of credit according to the instructions. On the other hand, the bank also has the right to ask the applicant to hand over a certain amount of funds or other forms of property as a guarantee for the bank to carry out its instructions.
According to the current regulations, foreign exchange owned by local authorities, departments and enterprises in China must usually be deposited in banks in China. If some companies need to import goods or technology by documentary letter of credit, banks in China will freeze the funds equivalent to the amount of the letter of credit in their accounts as the deposit for opening the letter of credit.
If the applicant does not have an account number in the issuing bank, the issuing bank is likely to require the applicant to deposit a sum equivalent to the total amount of the letter of credit in his bank before opening the letter of credit. This guarantee can be realized by mortgage or pawn (such as stocks), but it is also possible for banks to provide financing by using goods used for trading as collateral. The issuing bank must first investigate the marketability of the goods. If the goods sell well, the amount of financing provided by banks to customers through letters of credit is much higher than that of unsalable goods.
4. Obligations and responsibilities of the applicant and the issuing bank
(1) The applicant has three main obligations to the issuing bank:
The applicant must repay the loan paid by the issuing bank to the beneficiary for obtaining the documents. Before he pays, the document as the title certificate still belongs to the bank.
If the documents are consistent with the terms of the letter of credit, and the applicant refuses to "honor the bills", the deposits or frozen funds in the secured account will be owned by the bank.
The applicant has the responsibility to provide the issuing bank with all the expenses required for opening the letter of credit.
The responsibility of the issuing bank to the applicant: once the issuing bank receives the detailed instructions from the issuing bank, it has the responsibility to issue the bank as soon as possible; Once the issuing bank accepts the application for opening a letter of credit, it must act in strict accordance with the instructions of the applicant.
According to Article 5 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Letter of Credit Disputes: "After the issuing bank makes a commitment to pay, accept or perform other obligations under the letter of credit, as long as there is an obvious agreement between the documents and the terms and documents of the letter of credit, the issuing bank shall perform the payment obligations within the time limit stipulated in the letter of credit. If a party raises a defense against the basic transaction between the applicant and the beneficiary, the people's court will not support it. "
Third, the difference between standby letter of credit and letter of credit.
1. Letter of Credit After the beneficiary completes the conditions stipulated in the letter of credit, the issuing bank guarantees to pay the beneficiary; Standby letter of credit means that the issuing bank is responsible for paying the beneficiary if the applicant fails to perform the payment responsibility;
2. The letter of credit is paid by the issuing bank after the beneficiary completes the conditions stipulated in the letter of credit, while the standby letter of credit is paid by the issuing bank on behalf of the applicant who has not completed the payment obligation;
3. The letter of credit is the active payment of the issuing bank, while the standby letter of credit is the passive payment of the issuing bank;
4. The letter of credit must be used by the beneficiary, and the standby letter of credit is generally used as a backup, that is, the standby letter of credit is used as a bank guarantee, and the applicant will take the initiative to pay. So in general, the standby letter of credit will not really be used to claim money.
I believe that after reading the above introduction, you should know more or less that letters of credit are generally used in international trade import and export, which is also to better ensure that there will be no problems and disputes when paying. The above is about when to use the letter of credit, I hope it will help you.