International trade often faces challenges related to mistrust between the parties involved, especially when dealing with new companies and establishing business relationships for the first time. Questions like "How can the importer ensure the receipt of goods that meet the specifications?" and "How can the manufacturer ensure receiving the full payment on time?" Here lies the importance of having a mechanism that ensures a solution to these challenges.

Simply put, the answer to these questions comes through the use of a financial tool known as a "Letter of Credit." This article explains the concept of a Letter of Credit and its role in international trade, also presenting its types, advantages, and disadvantages.

And the question here is:

What is a Bank Letter of Credit?

Pros of Using a Bank Letter of Credit

Cons of Using a Bank Letter of Credit

Types of Bank Letters of Credit

Terms and Conditions

In simple terms, the answer to these questions comes through the use of a financial tool known as a "Letter of Credit" or "Akkreditif" in Turkish. The idea of this letter has evolved over the centuries to become one of the most important tools in the world of international trade, providing guarantees for buyers and sellers and facilitating international business transactions.

The actual and formal use of letters of credit became common in the 19th century with the development of banks and the international banking system. In recent decades, letters of credit have provided important and necessary financing tools for international businesses, widely used in international trade to provide guarantees for buyers, sellers, and banks. To understand the concept of a bank letter of credit, we will illustrate the idea with an example: the source is a factory in Turkey, and the importer is a company in Dubai.


 

A Bank Letter of Credit: It is a banking document issued by banks in Turkey at the request of the importing company in Dubai. This document is used as a financial guarantee for the seller in Turkey in the context of an international commercial transaction between the two parties. The main parties involved are:

• The buyer (in Dubai).
  
• The seller (in Turkey).
  
• The issuing bank (the bank issuing the letter of credit in Dubai): The bank that issues the letter of credit on behalf of the buyer.
  
  
  

The beneficiary bank (the bank benefiting from the letter of credit in Turkey): The bank that deals with the seller and provides payment security.

Pros of Using a Bank Letter of Credit

1. Payment guarantee.
   
2. Increased trust.
   
3. Encouragement of international trade.
   
4. Facilitation of financing.
   
5. Risk reduction.
   
6. Reduction of disputes.
   
7. International credibility.
   
8. Facilitation of large deals.
   

Cons of Using a Bank Letter of Credit

1. High costs.
   
2. Relatively complex procedures.
   
3. Delays in business operations.
   
4. Problems in details.
   
5. Payment delays in some cases.
   
6. Credit restrictions will be imposed on the buyer's accounts.
   
7. Interest costs if financing is used.
   
8. Precise compliance with laws and regulations.
   
9. Lack of flexibility in some cases. Lack of knowledge of the source or importer can raise doubts in one's heart.
   
   
   

There are several types of bank letters of credit, including:

1. Documentary Credit: This type is the most common and includes a request for payment against specified documents such as an invoice and certificate of origin.
   
   
   
2. Revolving Credit: Allows for the automatic opening of a new letter of credit after the current one is executed.
   
   
   
3. Confirmed and Unconfirmed Credit: The letter of credit can be confirmed or unconfirmed, with the confirming bank providing additional assurance to the beneficiary.
   
   
   
4. Standby Letter of Credit: Used as a financial guarantee and is less common in commercial transactions.
   
   
   
5. Transferable Documentary Credit: Allows the beneficiary to transfer part or all of the credit to a third party.
   
   
   
6. Revolving Documentary Credit Without Reimbursement: Allows for the renewal of the credit without the need for reimbursement.
   
   
   
7. Revolving Documentary Credit with Reimbursement: Requires reimbursement of the amount each time the credit is renewed.
   
   
   
8. Red Clause Documentary Credit: Allows the beneficiary to obtain advance financing in exchange for the delivery of goods.
   
   
   

These types vary according to the needs of the parties involved and the terms of the transaction.

Terms and Conditions:

The terms and conditions of the letter of credit are specified precisely, including the required quantity, quality, deadlines, transportation methods, required documents, and other information related to the commercial transaction.

Payment Procedures:

Once the specified conditions in the letter of credit are met, payment is issued by the issuing bank to the seller. This helps to avoid risks