Letter of Credit
Table of Contents:
Definition of Letter of Credit
A letter of credit or LC is a financial instrument issued by a bank on behalf of a buyer (importer) to a seller (exporter), guaranteeing payment for goods or services.
It ensures that the seller will receive payment once specified conditions, usually involving the presentation of required documents, are met.
LCs mitigate risks for both parties in international trade, offering assurance to sellers that they will be paid, while giving buyers confidence that payment will only occur upon successful fulfillment of predetermined terms.
What is Letter of Credit?
A letter of credit is a formal agreement between a buyer (importer) and a bank that ensures the seller (exporter) will be paid for their goods or services.
The bank acts as an intermediary, verifying the transaction's terms and releasing funds upon receipt of proper documentation.
It offers security to both parties by mitigating payment uncertainties in global trade, making it a vital tool for facilitating business transactions across borders.
Types of Letter of Credit
Revocable LC
Can be modified or cancelled by the issuing bank without notice to the beneficiary.
Irrevocable LC
Cannot be altered or revoked without the agreement of all parties involved.
Confirmed LC
Involves a second bank (confirming bank) adding its guarantee to an LC issued by a foreign bank.
Standby LC
Functions as a backup payment method if the buyer fails to fulfill its obligations.
Revolving LC
Automatically reinstates the credit after being used, suitable for ongoing trade relationships.
