Credit Application Letter

With the advent of globalization and increase in overseas trade, payment modes have been simplified. The parties to trade need a more simplified and assured payment mode. For this 'Letter of Credit' was evolved. To apply for this, the trader would need a credit letter application. However before this, it is essential to understand what a letter of credit is, and what the documents or requirements for applying for letter of credit would be.

A letter of credit is thus an instrument of payment used in trade. It is a document issued by the buyer's bank, known as the 'Issuing Bank' to the seller, also known as 'Beneficiary', which guarantees that the seller would be paid immediately, once the buyer confirms receipt of the consignment. In case, the buyer does not pay the seller, or fails to pay him/her due to some reasons, the issuing bank is liable to the seller, and would thus make the remaining or full payment to the beneficiary.

There are three parties to a letter of credit:

1. The Beneficiary: the seller/ the one who would receive the money
2. Issuing bank: the buyer's bank, that issues a letter of credit to its client in favor of the beneficiary
3. Advising Bank: The Beneficiary's bank which studies the letter of credit, and advises the beneficiary whether to accept it or not.

The issuing bank is liable to the beneficiary in case the buyer fails to make the payment. The advising bank on the other hand only advises the beneficiary, and is not liable to him/her.

Documents needed for Credit Application letter:

When the buyer applies for a letter of credit, he/she will need the following documents -

1. Disclosure of Material or Substance:

   This is also known as the file of Inventory, or Inventory File. It is a description of import material and the business. It basically describes what is being traded, and by whom.

2. Total Produce:

   The total quantity or units in the consignment need to be documented properly. It gives complete details of the products in the consignment, and the mode of transport used to trade the product.

3. Amount in terms of Foreign Exchange:

   The invoice sent by the seller should also show the amount to be paid in the currency used in the country that is importing the consignment. The taxes levied on the consignment, also should take care of the rules and regulations of the importing country.

4. Banking details of the importer:

   The importer has to submit all his/her banking details while applying for an application letter of credit. The bank authorities scrutinize the documents, and then approve the application of letter of credit.

5. Description of the advising bank:

   The advising bank needs all the documents - beneficiary's details, applicant's details, issuing bank details, consignment details, etc. The advising bank could reject a letter of credit, or advise the beneficiary whether or not to accept it.

The banks provide an application letter for requesting a letter of credit. The applicant needs to fill in the application form, and provide the documents mentioned above. The bank scrutinizes all the documents, and if all the documents fit in the bank's criteria, the bank issues the letter of credit, in favor of the beneficiary.

Next time, when you indulge in any trade activity, make sure you get a letter of credit so that your payment is assured, and you do not suffer any loss. Also, you can review Sample Academic Application Letter and Sample College Application Letter for more samples.