Difference Between Letter of Credit and Bills of Exchange

Business transactions of buying and selling from any part of the world are common. The trust factor lies in the payment methods opted by the buyer as well as the seller.

/10

Finance Quiz

Test your knowledge about topics related to finance

1 / 10

What is a bond yield?

2 / 10

What is the full form of "AGM"?

3 / 10

What is inflation?

4 / 10

What is a mortgage?

5 / 10

What is the role of a financial regulator?

6 / 10

What is the formula for calculating compound interest?

7 / 10

What is a Roth IRA?

8 / 10

Bank overdraft is a good source of finance for _________.

9 / 10

Earnings per share show investors the __________ earned per outstanding share of stock.

10 / 10

What is the difference between stocks and bonds?

Your score is

0%

There are different methods to collect the payment from the customer and deliver the item. There are different payment methods available across the globe when international business is happening.

Letter of Credit vs Bills of Exchange

The difference between the letter of credit and bills of exchange is that Letter of credit focus on the payment mechanism and bills of exchange is nothing other than a payment instrument.

Letter of credit vs Bills of

 

Comparison Table

Parameter of ComparisonLetter of creditBills of Exchange
Risk FactorThere is less risk of the importer’s bank having payment as default as once the letter of credit is issued, it cannot be withdrawn.There is a risk because it depends on the importer on making the payment or backing out of the process
Holding authorityGreater control is in the hands of the importerGreater control is in the hands of the exporter
ModeBank usually pays the moneyIt is always the individual who pays the money
Discount factorThere is no discount factor hereSeller can avail the discount facility
Payment factorIt will set the rules of the payment and it doesn’t support the actual payment processActual payment is received here by the seller

 

What is Letter of Credit?

Letter of credit is also known as Documentary credit and it is a part of Trade finance. There are usually two parties involved in this, one is the Buyer and the other one will be Seller.

The seller gets a query regarding the buyer’s requirement and then proceeds by letting the buyer knowing the product and the process.

Seller doesn’t agree for the same and insists buyer make the payment and get the goods delivered. A buyer approaches a bank which is called Opening bank/ issuing bank for issuing the Letter of credit to purchase the product.

Before the transit is made, the seller documents the Transport, Insurance, and other overhead details to the Advising bank then later the same goes to the issuing bank and then it reaches the buyer at last.

letter of credit
 

What is Bills of Exchange?

Bill of exchange usually happens between three parties, Drawer, Drawee and the Payee.

In the first instance, Buyer buys a product and usually prefers payment through cash. In the second instance, Buyer buys a product but prefers 45 days credit to make the payment.

The draft issues are called a bill of exchange and it is an acknowledgment signed by the Buyer and the same is given back to the Seller.

The third instance involves a certain amount of benefit too in the form of Bill of Exchange because cash is not blocked until the credit period.

bills of

Main Differences Between Letter of Credit and Bills of Exchange

  1. The main difference between Letter of credit is a financial document is, LOC is issued by a bank or a financial institution upon the request of the buyer to the seller but the bill of exchange is an acknowledgement that revolves around the buyer, seller and payee.
  2. Letter of credit doesn’t have a specific time period as credit, but bill of exchange has this credit policy concerning the days that have been asked for.

References

  1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=151849
  2. https://cbr.cba.org/index.php/cbr/article/download/2486/2486/
  3. https://digitalcommons.nyls.edu/cgi/viewcontent.cgi?article=1059&context=journal_of_international_and_comparative_law
One request?

I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️