One of the main advantages that LC grants to business owners is the fact that they can be resold to financial institutions. Something that other documents do not allow.
The main advantage of a LC is that the exporter can sell the promise of a bank to pay, not the promise of a commercial enterprise.
Through the use of LC, a business is more likely to keep the same exchange rates in the course of transactions regardless of the changes that countries do in their currencies. It is not in the best interest of local governments to show the world that the LC are not valid because there were changes in currency.
If the importing country changes its currency rules in the course of a transaction, it is likely that the government will allow that LC outstanding and are satisfied, for fear of launching their national banks (local) in an international disdain for a job if this LC confirmed by a bank in the country of the exporter.
The importers also see the benefits from the use of LC because they do not need to pay for the merchandise only when the documents arrive to a port or local airport.
LC also present difficulties to the importers:
Some of the disadvantages of LC are:
LC also have their risks:
One of them is the exposure to the changes in currency rates: Companies can be protected against currency fluctuations only to the extent that is specified on the LC. However, there are some fluctuations that would affect the prices of goods within a country and could make them more expensive and on this, LC may not have great influence.
Companies are vulnerable to the fluctuation in exchange rates. Even when LC can give some protection against this issue, it only depends on the economic dynamics of the country. If the prices of certain goods or raw material become higher, the cash flow would be affected in spite of the use of LC.
Exposure to foreign economies: When multinational corporations entering foreign markets to sell goods demand depends on economic conditions in those markets, therefore the cash flows are subject to economic conditions abroad.
LC would provide some stability but provide little guarantees when it comes to political and economic decisions of foreign governments.
The main advantage of a LC is that the exporter can sell the promise of a bank to pay, not the promise of a commercial enterprise.
Through the use of LC, a business is more likely to keep the same exchange rates in the course of transactions regardless of the changes that countries do in their currencies. It is not in the best interest of local governments to show the world that the LC are not valid because there were changes in currency.
If the importing country changes its currency rules in the course of a transaction, it is likely that the government will allow that LC outstanding and are satisfied, for fear of launching their national banks (local) in an international disdain for a job if this LC confirmed by a bank in the country of the exporter.
The importers also see the benefits from the use of LC because they do not need to pay for the merchandise only when the documents arrive to a port or local airport.
LC also present difficulties to the importers:
Some of the disadvantages of LC are:
LC also have their risks:
One of them is the exposure to the changes in currency rates: Companies can be protected against currency fluctuations only to the extent that is specified on the LC. However, there are some fluctuations that would affect the prices of goods within a country and could make them more expensive and on this, LC may not have great influence.
Companies are vulnerable to the fluctuation in exchange rates. Even when LC can give some protection against this issue, it only depends on the economic dynamics of the country. If the prices of certain goods or raw material become higher, the cash flow would be affected in spite of the use of LC.
Exposure to foreign economies: When multinational corporations entering foreign markets to sell goods demand depends on economic conditions in those markets, therefore the cash flows are subject to economic conditions abroad.
LC would provide some stability but provide little guarantees when it comes to political and economic decisions of foreign governments.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter of Payment SBLC Advance
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