Overview
A letter of credit (LC) is a vital financial instrument used in international trade, guaranteeing payment from the buyer to the seller. It acts as a third-party guarantee, ensuring the seller receives payment upon fulfilling the agreed-upon terms of the transaction.
Parties involved:
- Applicant: The buyer requesting the letter of credit (typically the importer).
- Beneficiary: The seller receiving the letter of credit (typically the exporter).
- Issuing bank: The bank issuing the letter of credit on the applicant's behalf.
- Confirming bank: The bank, usually in the beneficiary's country, confirms the authenticity of the letter of credit and guarantees payment.
Process:
- Application: The applicant approaches their bank and requests a letter of credit for a specific amount.
- Issuance: The issuing bank verifies the applicant's creditworthiness and issues the letter of credit, outlining the payment terms.
- Confirmation: The issuing bank sends the letter of credit to the confirming bank in the beneficiary's country.
- Presentation: The beneficiary ships the goods and presents the required documents, such as bills of lading and invoices, to the confirming bank.
- Payment: Upon confirmation of document compliance, the confirming bank releases payment to the beneficiary.
