Commercial letters of credit are considered the backbone of international trade finance. Bay Bank and Cowlitz Bank’s trade specialists are ready to assist exporters and importers in structuring and processing your letters of credit transactions to your benefits. We understand that speed is essential to global trade and other situations requiring letters of credit.
As a payment mechanism, letters of credit are one of the most commonly used financial instruments in international trade transactions. The principal reason behind the widespread and successful use of letters of credit is that they offer both the buyer and the seller a high degree of security not available with other forms of payments.
A letter of credit (L/C) is a written obligation by a bank (issuing bank), given to a seller (beneficiary) at the request of a buyer (applicant or account party), to honor drafts and/or other documents demanding payment upon the seller’s compliance with certain conditions specified in the L/C. The beneficiary must understand, therefore, that the L/C issuance is a conditional obligation of the issuing bank. Credit approval is necessary and would require appropriate lending structure.
The collection method of payment has been very popular in international trade because of its simplicity, competitiveness, and relative degree of safety compared to open account items.
Collections, like letters of credit, may be handled either for the account of a local customer seeking to collect from an overseas buyer, or for the account of a foreign bank seeking to collect from one of our local customers on behalf of a foreign seller. Therefore, collections may be either "incoming" or "outgoing" depending whether one is buying or selling on a collection basis.
Selling on collection terms is generally less costly to both buyer and seller than dealing on the basis of a letter of credit terms, and therefore is more competitive. In some parts of the world, collections are the most popular method of conducting international trade.