The International business exchanges involve risk between the merchant and buyer on the buy of specific merchandise. On the off chance that the buyer neglects to make the installment, the bank covers the sum due.
The contributing factors for the risk include the distance between the two parties, distinctive laws in every nation, and the absence of individual collaboration. This risk amplifies when buyers fail to pay for the merchandise to the vendors and when importers risk paying but not receive anything. Resolving these disputes become challenging because of the absence of assurance in transactions.
Using a letter of credit is one method of reducing the risks. The document can offer an assurance to the merchant that installment will come, while the buyer can make sure that installment won’t be made until the point that the merchandise is received.
Check Now: Guarantee transactions between buyers & sellers with Letter of Credit Add-on for Sage Enterprise Management (Sage X3)
Let’s see an Example of a Letter of Credit process,
- Suppose Company SPARKLE sells glass crockery in Florida and Company Bright manufactures glass crockery in London. Now, Company SPARKLE wants to import $100,000 hundred thousand dollars’ worth of glass crockery manufactured by Company BRIGHT, but Company BRIGHT is concerned about SPARKLE’s ability to pay for them.
- To address this, Company SPARKLE gets a letter of credit from its bank, Bank of Florida, indicating that Company SPARKLE will make the $100,000 payment in, say, 60 days, or Bank of Florida will pay the bill itself. Bank of Florida then sends the letter of credit to Company BRIGHT, which then agrees to ship the glass crockery.
- After the shipment goes out, Company BRIGHT or its bank then ask for its $100,000 by presenting a written draft (also called a bill of exchange) to Bank of Florida.
- Although letters of credit mostly benefit sellers, they also protect buyers, because Company BRIGHT must present Bank of Florida with written proof of the glass crockery shipment in order to get paid.
- This proof usually includes a commercial invoice, bill of lading, or an airway bill. After Bank of Florida pays Company BRIGHT, it turns to Company SPARKLE for reimbursement.
We have also included bank guarantee in our add-on.
We have created Letter of credit for both inward and outward distribution transactions.
In Inward LC. You will accept the Letter of credit from the Customers before shipping the merchandise. So in Inward LC screen, select the sales invoice and create LC. Here you can attach all the related documents such as copies of bill of lading, or an airway bill etc.
Hope this blog helps!
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Greytrix caters to a wide range of Sage Enterprise Management (Sage X3) offerings – a Sage Business Cloud Solution. Our unique GUMU™ integrations include Sage Enterprise Management (Sage X3) for Sage CRM, Salesforce.com and Magento eCommerce along with Implementation and Technical Support worldwide for Sage Enterprise Management (Sage X3). Currently we are Sage Enterprise Management Implementation Partner in East Africa, Middles East, Australia, Asia. We also offer best-in-class Sage X3 customization and development services, integrated applications such as POS | WMS | Payment Gateway | Shipping System | Business Intelligence | eCommerce and have developed add-ons such as Catch – Weight and Letter of Credit for Sage Enterprise Management to Sage business partners, end users and Sage PSG worldwide.
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