Letter of Credit
A payment service used when dealing with foreign countries – most often when the buyer and seller are not familiar.
No need for buyer to pay before goods are shipped
Seller is guaranteed to receive payment for goods
Possible for the buyer to negotiate price and credit
How it works
A Letter of Credit is an agreement where the bank guarantees for the payment of goods. For the guarantee to apply, the seller must meet all the requirements in the agreement or Letter of Credit.
A Letter of Credit is always initiated by the buyer; however, the seller may demand that the buyer uses a Letter of Credit. In effect, when selling an item to China, you are ensured payment when the buyer uses a Letter of Credit.
Letters of credit are usual for purchases and sales above NOK 20 000. If you trade with counterparties in foreign countries, we recommend that you assess the currency risk. If you need protection against fluctuations in currency rates, you can read more regarding forward contracts.
Recognized worldwide
Letters of Credit are international documents and regulated by the International Chamber of Commerce (ICC). There are several benefits for both buyer and seller:
Benefits for buyer
- Always informed when goods are shipped, no payments necessary until the goods have been shipped.
- Goods may be re-sold before payment is made.
- Simplified negotiations on price and credit period, as payment is guaranteed.
- No need for pre-payment.
- You are often prioritised should the supplier experience a product shortage.
Benefits for seller
- Is guaranteed payment for their goods.
- Purchases cannot be cancelled without the seller’s approval.
- Letter of Credit contributes to a secure and predictable income