In any business be it in Retail, Wholesale or Export the most sensitive point is payment and how it will be disbursed. Around 90% of new business deals fell through because of agreement on Payment terms. However, this is more so, critical in Wholesale and even more in export transactions.
L/C of letter of credits put simply is a Bank Guarantee of payment upon displaying supporting documents as proof of sending the product to the buyers. Here the deal is done between the exporters and importers banks on behalf on their clients. All terms are agreed in written documents and discrepancies in submission will mean the Bank will not disburse the fund until correction.
T/T or Telegraphic transfer or telex transfer, often abbreviated to TT, is a historic term used to refer to one of the form of exchange of money which happens in some of the countries for ex (uk). A transfer charge is often charged by the sending bank and in some cases by the receiving bank.(Wiki). In the Simplest way, T/T means sending the money to the sellers account before the Shipment happens or Advance Payments.
The Main Benefits of L/C are:
- After Documentation the L/C is Irrevocable (unless otherwise mentioned, so,as long as seller does his part right , payment is assured from Bank
- The seller will get proper specifications of product, quality standard and specific shipment Date.
- The opportunity to get financing in period
- The Buyer can control the time period for Shipping of goods.
- By a letter of credit, the buyer demonstrates his solvency;
- Helps to avoid Pre-payment
In most international Import Payment, L/C is used for the security it brings for Buyers and sellers. However, In Bangladesh, T/T is the most preferred by the manufacturers and exporters.
- Usually, for manufacturing Goods, a procurement of raw materials are involved. Most small manufacturers does not have the free cash to procure it. And for small orders or Small companies the banks aren’t willing for advance payment or Partial encashment of L/C
- To get advance from bank an additional interest will need to be paid.
- Without proper Financial Backing or transactions a Bank will not open L/C for the company
- For Products where Buyers are Few yet Product supply is scarce and Controlled by few , then the Seller Himself may will want Advance TT
- In general, L/C process is lengthy and most exporters wants to avoid it entirely for the hassle.
In Bangladesh, T/T and L/C both are widely used, it mainly depends on the scenario. T/T is a must even as a partial advance from most Manufacturers. Some will even want 100% of it as advance. L/C is used mostly the big companies and the Medium Size Enterprises that has a strong commercial department. However, T/T senders will likely have a strong bargaining power over the suppliers as the payment is received as advance. However, without a strong representative it is usually not advised to send T/T unless you are confident about the entire transaction.
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