Letters of Credit: How do they work?

There are so many ways in which we can pay someone for goods and services such as cash, card, cheque, bank transfer, letters of credit or maybe even bitcoin. Today we’re going to talk about using a Letter of Credit as a way to pay sellers.

What is a Letter of Credit? (LC)

A Letter of Credit (aka LC) is a payment method recognized and used in business whereby a document (the letter of credit) guarantees payment to a party. So, if the seller has met all the conditions of the letter of credit, the issuing bank must paythe Seller. This is a way for parties to ensure they are getting paid on time and in full.gartenmöbel design
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Article 377 of Oman’s Commercial Law promulgated by Royal Decree 55/90 defines a letter of credit as:

“Documentary credit is a contract whereby the bank undertakes to open credit at the request of a customer (the person ordering the opening of credit) in favor of another person (the beneficiary) using security documents representing moveable goods or goods made ready for carriage “

Who is involved in this transaction?

1. Buyer/Applicant to LC
2. The issuing Bank (the Buyer’s Bank)
3. Seller
4. The Seller’s Bank (the receiving Bank)

Here the issuing bank is obligated by law to implement the conditions of payment where the documents are consistent with the details set out in the contract (Article 379 of the Commercial Law)

Example: The Mechanics of a LC

1. Brickhouse is a company based in Oman. They decide to buy tiles for Tiles Mania in Italy. They want to order 1 container of tiles amounting to 500,000 Euros.
2. Tiles Mania has never heard of Brickhouse and doesn’t know if they are even able to pay them that amount and able to make on time payment.
3. To mitigate any risk, Tiles Mania put in their agreement that the payment will be by letter of credit.
4. Brickhouse will need to apply for a letter of credit at a local bank in Oman and comply with any requirements of the Bank.
5. The Bank will only pay the Seller once proof of shipment is given along with any other requirement as per the LC document. This gives the Buyer some protection instead of paying for goods to an unknown seller. 

Where’s the Money?

In a LC on the bank will pay on behalf of the buyer. The bank will only issue a LC if they are confident that the buyer/customer has enough funds/assets to cover the amount. Certain banks may freeze funds in the buyer’s account to cover the value of the LC or even hold assets of the buyer. Some banks may allow you to use a ‘line of credit ‘which is similar to obtaining a bank loan.

Banks will take a fee on from the buyer when issuing a LC to their customer. 

Types of LCs

Omani law recognizes two types of LCs – revocable and irrevocable- Article 380

The type of the LC must be expressly mentioned in the contract opening, if there is no mention, then the LC is deemed to be revocable.

Revocable Letter of Credit

Article 381 of the Commercial Law allows the bank to cancel, amend the LC when ordered to by the applicant without the need to notify the beneficiary. However the amendment and/or cancellation of the LC must be made in good faith. 

A revocable documentary credit does not give any obligation on the Bank towards the beneficiary (seller)

This type of LC is risky for the seller however it is easier to set up and may be suitable for certain types of businesses in the market.

Irrevocable Letter of Credit 

Article 382 describes the bank’s obligation in an irrevocable documentary credit as an absolute and immediate obligation as regards to the beneficiary if all conditions are met. An irrevocable documentary credit cannot be amended or cancelled without the agreement of all parties involved.

This guarantees payment to the Seller and is harder to apply for in banks. 

Key Summary Points

Tristan Chevrier est responsable de la publication de Charles. Tous ses articles sont rédigés en coordination avec la direction médicale de la plateforme Charles. Gilbert Bou Jaoudé, médecin sexologue. https://www.cialispascherfr24.com/ Bonjour Une fois la consultation effectuée comment obtiens t on le viagra sur quelle pharmacie en ligne.