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Letters of credit can sound more complicated than they are. Here’s a quick explanation of what a letter of credit is and why it can be important to your business.

 

A letter of credit is a guarantee issued by a financial institution (who is acting as the middle man between two businesses) saying that the seller of an item will get paid by the buyer once all of the terms of the sale have been met. This limits the risk of not getting paid on the seller’s end and guarantees that the buyer will get exactly what he or she paid for.

 

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The financial institution can guarantee the payment from the buyer because they have either verified the business has the funds on hand or the institution has issued a loan to pay for the goods. And since the letter of credit acts as a contract, the seller is required to fulfill the terms of the agreement before receiving payment. Everyone wins!

 

Businesses can greatly benefit from a letter of credit because it reduces risk, especially when making international purchases.

 

For more information, please contact us.