Letter of Credit

Import from China and Earn on eBay

Today, everybody is interested in making some profits either by selling merchandise through your small shop or perhaps through eBay. If you were to source your goods in your country and then sell them through eBay in your country, then your profit margin will be small. If you want to earn $2000 or even more on eBey in just a single day, then you should source your merchandise from other countries. Where there are the markets, there are the low-cost commodities made in developing countries. Try sourcing from, say China, and you will see yourself making 300-plus percent. You may ask, Why buy so low price things from China? The answer is low cost.

China, which has 1.5 billion people, is a large country. As well as there are many cheap labour forces. China is the workshop; no other country can be mentioned in the world. There are varied qualities of goods in China meant for different markets – what you ask is what you get. You may get accustomed to buy the Chinese cheap things. The wholesale price from China is decimals or centesimal or maybe even less. Who is the biggest winner in the whole distribution? Is it the producer or the consumer? No, it's you, the seller.

Assuming you now has identified a good supplier of your merchandise from China or other countries, then how do you go about making payment so that your merchandise can be shipped? Do you send a cheque to your supplier and expect them to send the merchandise to you or do you tell them to send the shipment and expect you to make payment after you have received the goods? Either of these is not secure to you or to the supplier and you will be surprised that it often will not work.

Letter of Credit

Then how do you go about this? And because you will want the economy of scale, the merchandise you will be importing will be large and worthy $5000, $10,000 and sometimes as much as $100,000. With this kind of money, you will need to be secure otherwise you may end up losing your hard earned money. To do this kind of transaction you will need a Letter of Credit which will provide a secure means of carrying out this kind of transaction.

And what is Letter of Credit? You will need to instruct your bank to transmit a letter of credit to your supplier’s bank in his country which will become the means by which your supplier will obtain payment. You start by asking your supplier to provide you with a proforma invoice showing the cost of goods ordered and delivery date. Together with the invoice, you will correctly complete the necessary documents and present them to your bank. If the terms of credit are met, your supplier can receive credit from his home bank immediately. You are in effect providing your supplier with immediate credit in return for a guaranteed assurance from a reputable bank that the export documents required to deliver the goods to you have been completed to the bank’s satisfaction.

This credit can either be revocable or irrevocable. A revocable letter of credit is rather rare because it means that the terms of the credit can be cancelled or amended by you at any time without notice to your supplier. Most letter of credit nowadays are irrevocable, which means that once your conditions in the letter have been agreed by the supplier, they constitute a definite undertaking by your bankers and your supplier’s bankers and can not be revoked.

Banks advices letters of credit – they handle the transaction and receive payments from the issuing bank of an overseas buyer. But the letter of credit in this situation is only as good as the strength of the overseas bank involved. But naturally banks throughout the world have good credibility and the fact that your bank is willing to transact business with your supplier’s banker adds more confidence to you.

Even better security is achieved if the irrevocable credit is confirmed by an advising bank, then the confirming bank stands fully in place of the issuing bank abroad, and provided all the terms and conditions of the credit are fulfilled by your supplier, payment is assured by the banking system without recourse - without further call on the supplier. So when you have negotiated in the contract with your supplier for a confirmed irrevocable letter of credit then security of payment, as far as humanly possible, is achieved.

But whether or not the credit is confirmed, it is essential that your supplier checks the credit terms immediately to make sure they are compatible with the commercial contract made with you. However, In dealing with the documentary credits, the bank is concerned only with the documents to be presented and not with goods or services involved.

Documentary credits may provide for payments at sight or for acceptance of a term bill of exchange by either the issuing bank in your country or the advising bank in your supplier’s country.

In summary this means:
1. A confirmed irrevocable letter of credit will ensure your bankers send a certain sum of money to be paid to your supplier’s bankers, and that sum will be paid as soon as your supplier’s bankers receive documentary evidence that the shipment has been made in accordance with your requirements. Your requirements will be detailed in a pro forma invoice which your supplier will have sent to you.

2. The documentary evidence is contained in bills of landing for sea shipments or air waybill for air shipment. The bill will show that the goods ordered by you have been handed over to the ship or airline. The evidence will also include the invoice, insurance documents, etc.

3. In as long as your supplier carries out his side of the bargain by sending the goods as requested by you, you can not suddenly cancel the order – it can not be revoked.

4. The opposite is also true. If you have merchandise that you would be interested in exporting to another country, then you will send a pro forma invoice to your customers so that they can raise a confirmed letter of credit in your favour.

You now can see that this method of payment for goods ordered from another country safeguards the interest of both you and your supplier. You can not cancel your order so long as it is met in accordance with your instruction and your supplier does not get paid until he has carried out his obligation of providing the agreed goods at the agreed price.