Joe Nsano – Legal & Financial Consultant
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I own a Small Trade Business that requires importation of goods from neighbouring countries. For importing the goods, I have to travel carrying cash and it is getting risker. I do not feel safe to wire transfer funds to suppliers as they might ship the wrong goods or not supply at all. What is the best way to tackle this issue?
You are absolutely right. Growing your business means building and strengthening trust with the suppliers, while securing both parties’ interests. The best legal-banking instrument is the Letter of Credit.
The Letter of Credit is defined as a pay- ment instrument used in international trade transactions, through which the buyer’s bank commits to pay to the sup- plier an agreed amount upon shipment of goods. The importer’s bank issues the Letter of Credit based mainly on the agreement between the exporter and the importer. This agreement might be in a simple form of a detailed Pro-for- ma Invoice issued by the supplier or a purchase agreement.
In both cases, the following details have to be clearly stated: the nature of the goods, the type of package, the quantity, the price, the place of manufacturing, the place of shipment, the port of delivery, the mode of transport etc. Due to the high risks in international dealings, the Letter of Credit has become a very important tool of inter- national trade. As banks are considered to be trustworthy institutions, they act on behalf of the importers (buyers) by protecting its clients in ensuring that not payment will be made to the supplier until the bank receives a confirmation that the ordered goods have been shipped in the defined conditions.
As you may notice, a commitment from your banker is a firm and legal binding commitment, which is equal to a credit extended to you. Your banker will have to assess your creditworthiness. The Letter of Credit will protect your interest while securing the supplier to be paid once the goods are shipped