Letters of Credit: a Finance Tool for Managing Cash Flow in the Muntinlupa City Business Community

Abstract

In the 1800s, the Letters of credit materialized in Europe and grew purposely to serve international trade, which flourished since the 1700s despite the non-uniformity of national laws. The reviews of related literature and studies conducted by the researcher, identified various gaps concerning the use of letters of credit: First, there were no studies conducted yet concerning the use of letters of credit as a financial tool for managing cash flow amongst the Business Community in Muntinlupa, City; and, Secondly, no studies were done in the City of Muntinlupa correlating letters of credit as a financial tool in managing cash flow. These led to the development of this pioneering research study in the City of Muntinlupa. This descriptive study aimed to determine the openness of the businesses, banks, and government agencies in the Alabang Muntinlupa area to use letters of credit as a mode of payment to effectively manage the company’s cash outflow. The study had 35 automobile companies and bank financing companies as its primary respondents. The researcher used Cronbach's alpha reliability coefficient for Likert-type scales data analysis tool to test the internal consistency of the questionnaire. A high correlation signaled high internal consistency. There was a significant relationship between the perceived effectiveness of a Letter of Credit and the perceived awareness of benefits, risk factors, and source of funds for letters of credit.