Bill of exchange vs. Letter of Credit (1 Viewer)

[swifty13]

Hey guys
I'm a bit confused about the difference between a letter of credit and bill of exchange. I've heard that a letter of credit is less risky and a bill of exchange is the riskiest payment method but I don't understand why.

This is what I know about letter of credit:
A letter of credit is a commitment by the importer’s bank, which promises to pay the exporter a specified amount when the documents proving shipment of the goods are presented. The document contains specific instructions from the buyer of the goods, giving the seller the authorisation to draw a specified sum of money from the buyer’s bank under certain conditions.

Bill of exchange

A bill of exchange is a document drawn up by the exporter demanding payment from the importer at a specified time. The exchange usually contains an instruction for a third party such as a bank to pay a predetermined sum of money at a designated future date on demand to the seller of the products. They both involve the third party - the bank - paying back the exporter so I don't really understand how they differ.

 

[Examine]

In my opinion, the textbook (Business Studies In Action) has explained this very vaguely, though I'll try look into it and see.

 

[Airstrike]

This is what I have in my notes
Bill of exchange - document drawn by the exporter demanding payment from the importer at any time
to me...this basically tells me that: the person who is buying the goods must have readily available funds...the person who is delivering has a contract/document
Letter of credit - bank of the deliever pays the person who is buying the goods > so basically the bank is a middle man

that's what I know...i'm probably wrong so yeah...

 

[seremify007]

I saw this thread a while ago and purposely didn't respond because I'm not 100 sure. My understanding was the key difference was something to do with the risks related to endorsement and who had the right to make claim to who and whether there was default risk/recourse.

 

[aaron_syd]

A letter of credit is like a promise from the importer's bank that the payment will be made to the exporter, once proof of shipping is shown. Conversely, a bill of exchange is a document from the exporter's bank demanding payment from the importer by a specified date. They are kinda opposite, and exporters prefer letter of credit because there is less (or no) risk of the importer's bank defaulting on the payment. Once the letter of credit is drawn and offered, it cannot be withdrawn. A bill of exchange is still risky, as the importer has not left the money with a bank, and therefore, may decide not to pay or back out of the trade agreement. It allows greater control for the exporter though (somehow).

Thats what i think.

 

[swagmeister]

Bump (only 3 years later haha)