Letter of Credit is the letters that are written to handle credit matters. In terms of trade credit is “a promise of future payment”.
The society has progressed with the passage of time, and so has the world of trade and commerce. A little volume of business is now done on cash payments or on C.O.D. basis.
Business transactions are largely held on credit terms. Credit routine requests are made, and credit lines are granted.
The letters that are so exchanged to carry out business activities in terms of credit are called Letter of Credit. Let’s check below the various types of letters of credit in detail.
See Also: Types of Invitation Letter
Different Types of Letters of Credit
Keeping in view the process generally followed to decide credit matters, Letter of Credit may be divided into the following types:
- Letters Seeking Credit
- Letters Requesting for Credit Information
- Letters Giving Credit Information
- Letters Granting Credit
- Letters Refusing Credit
Letters Seeking Credit
These letters are written by the customers and firms that want to open credit accounts with some sellers, suppliers, manufacturers or financial institutions.
Unless a trader or a firm itself offers its goods on credit, requests to seek credit lines are required to be made.
A letter seeking a credit line contains the expressed desire of the customer to open a credit account.
The request is further supported by necessary information pertaining to the nature and volume of his business.
If thought necessary, names and addresses of the references who can vouch for the financial status of the customer, are also provided in a letter seeking a credit line.
Letters Requesting for Credit Information
These letters are to obtain such information as is needed by the credit-granting firm to take a decision on the credit request of the customer. Credit information is obtained from different sources.
The source of information may be a bank, a trade referee or the customer himself.
The objective of these letters is to know about the status of the customer and his ability to meet his financial obligations.
In case of the source of information is a bank, an agency or a referee, assurance should be given to them that whatever the information they give shall be treated as confidential.
Letters Giving Credit Information
These letters are written in reply to the letters that are sent to collect information on the status of the customer.
They play a very important role as it is primarily on the basis of the information supplied in them that a decision to grant a credit line or otherwise is taken.
It is, therefore, of vital importance that whatever the recommendations are made through these letters are honest, exact, impartial and based on facts.
Letters Granting Credit
In case the request of the customer is acceded to and a decision to grant him a credit line is taken, he is informed accordingly.
This type of letter is very important as it offers a sort of credit contract to the customer.
The writer must take care that the volume of credit facility and the terms and conditions on which credit line is allowed to the customer are clearly and exactly mentioned to minimize the possibility of any dispute at a later stage.
Letters Refusing Credit
In certain cases, it is not found feasible to grant a credit line to a customer. Instead of keeping silent, it is obligatory on the part of the credit-granting firm to inform the customer of their decision.
See Also: What is Adjustment Letter
Conveying a refusal to the expectant customer is a difficult task. All courtesy should be incorporated in such letters.
The best way to write this sort of letter is to thank the customer for his interest in your products and then explain to him the reasons why it is not possible to grant him the facility of a charge account.
If possible, some alternative may be offered to the customer to keep prospects of business alive.
