Letter of Credit (LC)
Term of the Day - 1 February 2024
Today’s Term is “Letter of Credit (LC)”.
A Letter of Credit (LC) is a financial instrument used in international trade transactions to provide payment security for both the buyer and the seller. It is issued by a bank at the request of the buyer (the applicant) and guarantees that the seller (the beneficiary) will receive payment as long as the terms and conditions of the letter of credit are met.
The LC serves as a written commitment from the buyer's bank to pay the seller a specified amount of money within a predetermined timeframe, typically upon presentation of compliant documents proving that the goods or services have been delivered as per the terms of the sales agreement. The documents usually include invoices, bills of lading, packing lists, and certificates of origin.
There are different types of LCs, including (among other LC types)
irrevocable LCs (which cannot be changed or cancelled without the consent of all parties)
revocable LCs (which can be modified or cancelled by the buyer's bank without prior notice)
confirmed LCs (where a second bank adds its guarantee to the LC), and
standby LCs (which serve as a form of payment assurance in case the buyer fails to fulfil their obligations).
Letters of credit play a crucial role in facilitating international trade by mitigating risks for both buyers and sellers and providing assurance that payment will be made once contractual obligations are met.
