Differences between Export Letters of Credit (LC) and Import Letters of Credit (LC)

15/4/2024
Sunayana Puri Anand
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Differences between Export Letters of Credit (LC) and Import Letters of Credit (LC)

Letters of Credit (LC) are widely used in international trade to facilitate secure and reliable transactions between buyers and sellers across borders. While both export LC and import LC serve a similar purpose of ensuring payment in trade transactions, there are key differences between the two. This article explores the differences between export LC and import LC and how they impact businesses engaged in international trade.

Export Letters of Credit (LC)

An Export LC is a financial instrument issued by a bank on behalf of an exporter (seller) to guarantee payment for goods or services provided to an overseas buyer (importer). The Export LC serves as a commitment by the importer's bank to pay the exporter a specified amount, provided that the exporter meets all the terms and conditions outlined in the LC.

Key Differences between Export LC and Import LC

Issuing Party: The primary difference between export LC and import LC is the party that initiates the LC. In an export LC, the exporter's bank issues the LC on behalf of the exporter to guarantee payment from the importer's bank. In contrast, in an import LC, the importer's bank issues the LC on behalf of the importer to guarantee payment to the exporter.
Payment Direction: Another key difference is the direction of payment. In an export LC, the payment is made from the importer's bank to the exporter's bank once the exporter presents the required documents proving shipment of goods or provision of services. In an import LC, the payment is made from the importer's bank to the exporter upon presentation of compliant shipping documents.
Compliance Requirements: Export LC and import LC may have different compliance requirements based on the country of import or export and the type of goods or services being traded. Exporters and importers must ensure that all required documents are in order to avoid delays or discrepancies in payment.
Risk Allocation: Export LC and import LC also differ in terms of risk allocation. In an export LC, the risk of non-payment is borne primarily by the importer's bank, as it has issued the LC guaranteeing payment to the exporter. In an import LC, the risk of non-delivery or non-performance is borne by the exporter, as the importer's bank has guaranteed payment upon presentation of compliant documents.

Conclusion

In conclusion, while export LC and import LC serve similar purposes of ensuring payment in international trade transactions, there are key differences between the two in terms of issuing party, payment direction, compliance requirements, and risk allocation. Understanding these differences is essential for businesses engaged in international trade to effectively manage their trade finance operations and mitigate risks associated with cross-border transactions.

Sunayana Puri Anand

Ms. Sunanyana Puri is a Qualified Company Secretary and a Law graduate and is heading the operations of Chandra Credit Ltd. With her rich Experience and Academic Knowledge in Compliances, Law, and Finance she is committed to and has been able to take this Organization to a global level, Her dynamic personality and oral skills given with creativity and sound management and marketing potential have proved to render unbeatable performance and successive growth in terms of building relations with Lenders/investors.