My question is that I am starting a small business and some of my
suppliers will take a Line of Credit from a bank or financial company.
How does a line of credit work for purchases and is it a safe way to do business
for the buyer?

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Clarification of Question by marty9713-ga on 20 Oct 2005 05:20 PDT

I am very sorry and this is totally my mistake.  I meant to ask about
a letter of credit from a bank.  In regard to a letter of credit how
safe is it for the buyer.  Is the money held until the products are
delivered or how would that work.  Once again I am sorry for the
confusion.

Marty,
I have difficulty understanding your question.
Your only risk normally would be whether the suppliers can deliver
their goods to you as ordered, a business risk not a credit risk,
unless you pay in advance.
It would be a business risk in that you might not have the materials
to make your products, or if you retail their products, not have goods
to sell.
If your suppliers are also starting their business (which I am
inferring since otherwise they would probably already have lines of
credit), I don't see how this can create a risk for you.
What have I missed?
Myoarin

A long while back, I used to work a bit with international sales and
the issues of letters of credit did come up. (And, yes, it's easy to
confuse the terms "letter of credit" and "line of credit" which are
very different things; I used to do it often.) My understanding and
recollection is that, yes, in order for the seller to be paid the
money associated with a purchase by letter of credit, the seller has
to produce documentation confirming delivery of the goods.

Whether or not the process is 'safe' for the buyer is an interesting
question. Certainly the whole concept of the Letter of Credit is
designed to reassure the seller that the seller will be paid. If
discrepancies arise (say, if the seller says it delivered the full
quantity of goods, but the buyer says it received a different amount,)
they may be more complicated to work out since you're dealing with
three parties (the buyer, the seller, and the bank providing the
letter of credit) rather than just the two (buyer and seller) you'd
have in a basic case of simple open credit terms, but that doesn't
necessarily make the process "unsafe." And I suppose the bank may
charge fees to the buyer for handling the Letter of Credit, but that
may not be "unsafe" either.

Marty,
No problem.  There have been earlier questions about Letters of
Credit, and I, like Atk-ga, once handled them. Check out this site, it
explains them quite well:

http://www.sitpro.org.uk/trade/lettcredintro.html

Just a basic clarification:  if you are the buyer of the goods, you
open the letter of credit though your bank.  When the supplier
receives it, he knows that if he provides the documents specified
(which demonstrate that he has shipped the goods), he has the
assurance that he will get paid.  You have to find a bank that will
open a letter of credit  ("LC") for you.  Ask your own bank first. 
Another bank may ask to have the price of the goods deposited with
them.

Read the site.  If you have any questions, I will be pleased to try to answer them.

This is a free comment and not an official "answer" to your question.
Regards, Myoarin