Letters of Credit
last updated 2005
of LCs is not normally something you would teach in a general overview
course on International Business Management - but for some people who are
interested in actually becoming involved in exporting and importing, LCs
are a necessary thing which you must understand.
Major banks handle LCs for small, medium and large sized customers. Most banks have websites in which there is a lot of educational information to assist people. Canadian banks have some good sites describing and explaining LCs.
For the purposes of this course, we will direct students to the material on the RBC site , some of which is shown below.
|What are LC s||"Letters of
Credit are guarantees of payment to help you make purchases or transact
business with companies with whom you have limited trading experience or
Usually banks play the role of the 3rd party since they are insitutions recognized to be trustworthy for this sort of thing, and they sometimes also obliged to convert the currency as well - which banks can take care of. The bank will also charge a fee for the service and this is just one of the ways banks make money in the field of international business.
|Medium and large
sized companies that are importing and exporting on a monthly or weekly
basis use a lot of LCs and this can mean big business for a bank, particular
a Canadian bank that has a big exporter as a client, like Nortel or Magna.
To be competitive, and constantly attract new customers who are growing
their business, the major banks in Canada have sections on their websites
in which they explain import and export terms and processes.
Royal Bank has a particular useful site. Vincent Barboza, Regional Manager, Trade Finance, International Trade Centre of RBC told Tim Richardson in a July 2005 email about some RBC webpages that were pertinent to LCs and provided the URLs you can see below.
|basic forms of letters of credit||the Credit Research
Foundation has a simple explanation of the
two basic forms of letters of credit:
Standby and Documentary see
Standby Letter of Credit (often called non-performing letters of credit)
Documentary Revocable Letter
Special Letters of Credit
from the RBC web site. a great list explaining the process for a simple LC.
from the RBC web site. a great list explaining the different types of LCs
|For the purposes of MGTC44,
it is not critical to memorize the different types of LCs, rather it is
suffice to understand that different types do exist for the purpose of
different payment circumstances.
Problems with Letters of Credit
One of the things that is important for students of management to understand about business and international business is that the "real world" very seldom operates as precisely as the theory in the classroom. In the real world, there are often problems with "satisfying" the requirements of an LC on the side of the sender (seller), and the receiver (buyer).
If an LC is irrevocable (meaning the credit cannot be amended or canceled without the agreement of all parties) then the buyer may have a big problem if something develops that they cannot fix - because the 3rd party will be obliged to pass the money to the seller once the goods are landed.
||CONTACT I MAIN PAGE I NEWS GALLERY I E-BIZ SHORTCUTS I INT'L BIZ SHORTCUTS I MKTG&BUSINESS SHORTCUTS I TEACHING SCHEDULE|
|MISTAKES ITEXTS USED I IMAGES I RANK IDISCLAIMER I STUDENT CONTRIBUTORS I FORMER STUDENTS I|