1. l/c settlement solves the contradiction of mutual distrust between trading parties. First of all, the premise of the use of letters of credit is that buyers and sellers lack a mutually satisfactory trust base and need to implement international trade settlement with the help of bank credit. The settlement is made by letter of credit and guaranteed by the bank. As long as the seller delivers the goods according to the contract, the buyer can get the payment, and the buyer does not have to pay the payment before the seller fulfills the delivery obligation stipulated in the contract. This payment method makes the buyers and sellers who are not at the delivery site in the same position when performing the contract, and to a certain extent, makes them regain the sense of security in the on-site transaction of "paying with one hand and delivering with the other" and solves the contradiction of mutual distrust. Secondly, the risk cost is reduced. In international trade, the risk cost of international settlement is mainly the risk cost of default. For example, under the collection method, after the exporter delivers the goods to the importer's country, the importer is much more likely to refuse to pay or pick up the goods than the letter of credit payment method.

2. Ensure that exporters receive foreign exchange safely and importers deliver goods safely. For exporters, a letter of credit can ensure that exporters can submit documents to the bank for withdrawal according to the provisions of the letter of credit after the delivery, and even if the importing country implements foreign exchange control, it can also ensure the receipt of documents. For importers, letters of credit can ensure that importers can obtain documents representing goods when paying for goods, and can control exporters to deliver goods on time according to the quality, quantity and terms of letters of credit. It is a rational behavior of international traders to pursue the maximization of their own interests in transactions. The biggest interest of exporters is to receive money without providing goods, and the biggest interest of importers is to get the goods they want without paying. When there is default risk, when considering the cost of trade risk, the preferred payment method of both parties is letter of credit.

3. Both importers and exporters can get financing under the letter of credit. For importers, only part of the deposit is required when opening a letter of credit, and the difference is paid after the documents arrive. If it is a usance letter of credit, the importer can also borrow money from the issuing bank with the trust receipt, pick up the goods first and then sell them, and pay the issuing bank at maturity. For exporters, after the goods under the L/C are loaded, they can present documentary presentation to the export bank with the documents required by the L/C to obtain the full payment. Disadvantages of letter of credit settlement in international trade

1. The risk has not been completely ruled out. Under the letter of credit, exporters may still face the risk that importers will not open letters of credit or will not open letters of credit on time. The exporter's bank may face the risk of bankruptcy or unreasonable refusal by the issuing bank. The practical utility of letter of credit business focuses on urging importers to fulfill their payment obligations, while it is relatively less binding on exporters to provide documents that meet the requirements of letter of credit. When there is a great risk of default in the transaction, the letter of credit is the lowest settlement method to pay the transaction cost; However, when the risk of default is small, the use of letters of credit will increase the transaction cost, which is not adopted by rational traders.

In the letter of credit business, as long as the documents are in conformity, the issuing bank will pay. If the documents presented are consistent, and the importer finds that the goods actually received do not meet the contract requirements (such as quality and packaging defects, etc.). ), the importer cannot ask the issuing bank to refund the payment or ask the issuing bank to recover the payment from the exporter. If there is a problem with the goods, the buyer and the seller will solve it themselves. For the issuing bank, as long as the documents are consistent, they must be cashed. However, the bank's payment responsibility is not affected by the applicant's claim or defense. If the documents are consistent, the applicant cannot ask the issuing bank to refuse payment because the beneficiary's previous claim for export payment has not been resolved, and use this payment to offset the claim.

3. The settlement procedure is complicated and the cost is high, which increases the cost of trade settlement. First of all, in addition to the necessary delivery, presentation, collection and payment, there are also procedures such as applying for opening a letter of credit, notification, negotiation and examination of documents, and the procedures are complicated; Thirdly, in the letter of credit business, banks can obtain various benefits through each service, such as opening fees, notification fees, negotiation fees, confirmation fees, amendment fees, etc., which increases the settlement cost.