Various Situations Which a Letter of Credit Could be Used (Essay Sample)

A Letter of Credit
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A letter of credit is sent by a bank to another bank to serve as a reminder that the buyer will credit the sellers account with the correct amount when the grace period becomes due. It is often used in international transactions to help insure payments and to help protect the seller of a particular good against non-payment by the buyer. If the seller had a sales transaction of $ 1 million, he would utilize a letter of credit since that is a huge amount and the buyer may refuse to credit his account when the grace period expires. If the gross margin were 80 percent, I would advise the seller to use a letter of credit since that is a huge amount and the buyer may default payment. It does not change my analysis since if the seller is not aware of the purchaser and the amount being transacted is significant, and I would advise the seller to utilize a letter of credit since the buyer may default payment at the expiry of the grace period.
In cases where I know the customer, and am satisfied with their credit, I would not require a letter of credit since I am assured that the buyer will pay when the grace period expires. I would consider selling the product on an open account where I do not instruct the customer's bank to credit my bank accou...