Difference between Letter of Credit and Drafts
Difference between two payments methods of international trade – Letter of credit and Drafts are given below:
| Letter of Credit | Drafts |
| Bank issues Letter of Credit on behalf of the importer assuring payment to the exporter upon presentation of the shipping documents to the bank. | Draft or Bill of Exchange is drawn by the exporter instructing the importer to pay face value of the draft on sight or at certain time in future. |
| If the documents are in compliance with the terms of LC, Bank is liable to pay the seller/exporter regardless of the buyer’s ability or willingness to pay. | Banks act as intermediaries in processing the documents and the collection of payment for the exporter. |
| Importer’s bank is obligated to make payment to the exporter on behalf of importer if presented documents are fully complied with the terms of LC. | Importer has three options after examining the documents: To pay immediately in case of Sight draft To pay at future date in case of Time draft Or to refuse to pay the draft |
| Payment is made to the exporter only when shipment is made. | Sight draft: Payment is made on presentation of the draft to the importer. Time draft: Payment is made by the importer on maturity of the draft. |
| Goods will be available to the buyer after payment. | Sight draft: Goods available to the importer after payment. Time draft: Goods available to the importer before payment. |
| In case of LC exporter has to face risk very little or none depending on the terms conditions & of LC. | Sight draft: If draft is unpaid, goods will have to dispose of. Time draft: Exporter relies fully on buyer to pay draft at maturity. |
| Importer is assured that shipment is made. | Sight draft: It is assured that shipment is made. Time draft: It is assured that shipment is made. |
| Importer fully relies on exporter to ship goods as described in documents. Because bank doesn’t deal in goods. | Sight Draft: Importer fully relies on exporter to ship goods as described in documents. Importer might have an option to inspect goods before payment. Time draft: Relies on exporter to ship goods as described in documents. Importer might have an option to inspect goods before payment. |
| LC costs more to the importer. | Drafts are less expensive for the importer. |