A letter of credit

A letter of credit Ministry of Science and Higher Education of the Russian Federation Federal State Budgetary Educational Institution of Higher Education "Plekhanov Russian University of Economics" Moscow Industrial and Economic College Completed by: 3rd year student of the BD-33 group Bolotina A.A.

A letter of credit A letter of credit is a non—cash form of payment in which money is transferred by the buyer to the seller not directly, but through the mediation of a bank. The credit institution acts as a guarantor of the fair conduct of the transaction. Simply put, the buyer opens an account, transfers funds there in full, the bank freezes the money and issues it to the seller only after he confirms the fulfillment of the terms of the agreement. The bank charges a fee for these services.

When a letter of credit is used Large transactions between individuals A letter of credit is often used for the purchase and sale of real estate on the secondary market. Transactions between legal entities within Russia Companies also use letters of credit in large transactions, including the sale of a company share or a block of shares. Foreign trade, import-export operations There are no longer three parties involved in cross-border transactions using a letter of credit, but four.

Types of letters of credit revocable or irrevocable A revocable letter of credit can be changed or cancelled at the request of the buyer without prior agreement with the seller, that is, by writing an application. An irrevocable letter of credit is adjusted or cancelled only with the consent of both parties. The contract must clearly indicate whether the letter of credit is revocable or irrevocable. In the absence of such an explanation, the letter of credit is considered revocable.

Types of letters of credit covered (deposited) and uncovered (guaranteed) With a covered letter of credit, the buyer's bank immediately transfers all the money to the seller's bank, that is, covers all obligations. This scheme is used in the course of transactions in Russia. Uncovered letters of credit are more common in cross-border transactions. They are also called guaranteed. In this case, the buyer's bank gives the seller's bank the right to debit the required amount from the account as obligations are fulfilled.

How to open a letter of credit Basically, the letter of credit is opened by the buyer in favor of the seller, who may not be present at the same time. To open an account, you need to go through the following steps: choose a reliable bank and contact the office in person or online, if possible; write an application, documents are also provided; conclude a service agreement with the bank – be sure to specify the amount, expiration date, details of the beneficiary, the conditions under which payments are made, the responsibility of the parties; in completion of depositing money – usually they are transferred from the account.

Pros and cons of letters of credit Positive Payments through a letter of credit are transparent and safe for both the seller and the buyer; A letter of credit can be opened in almost any bank and branch; A letter of credit can be issued quickly. Banks in Russia have been working with letters of credit for a long time, so they have established a scheme of interaction with customers, it can often be issued online and in the bank's mobile application; When opening a letter of credit, the personal presence of the seller is not required. Minuses Letters of credit are not included in the state deposit insurance system; Complex document management: to disclose a letter of credit, you need to accurately fulfill all the prescribed conditions; The Bank charges a commission for opening a letter of credit; When conducting a transaction using a letter of credit, you need to meet the deadlines prescribed in the contract.