A Letter of Credit (or LC) is a trade finance document which is used to ensure that the payment of goods and services are completed between a buyer and a seller. The rules and regulations of a Letter of Credit are issued and structured by ICC through their Uniform Customs & Practice for Documentary Credits (UCP 600), used by producers and traders globally. Both parties use an intermediary, namely a bank or financier, to issue a Letter of Credit and legally guarantee that the goods or services received will be paid for. LC works as an effective legal bond document which is acknowledged by countries all over the world.
An LC includes certain terms which can be unfathomable for a layman at first but once we start with the export-import work, they become easily understandable. The terms include:
Advising bank –This bank accepts and then notifies the beneficiary of the LC
Confirming bank –Bank that agrees to honor and pays the LC to the beneficiary and receives payment from the advising bank.
Irrevocable – A non-amendable LC, unless agreed by all parties
Issuing bank/issuer – the party that issues the LC
Presentation – delivery of the LC documentation and any other required documents that are required by the beneficiary should payment be made / the LC honored
Revocable – a type of LC that can be withdrawn, amended or canceled the issuing party at any time
Standby – the most common LC type whereby agreement to pay is made under certain conditions.
Letter of Credit is used by traders and wholesalers who produce goods on a large scale. This document comes in handy in critical situations where the receiver of the goods refuses or is unable to make payment to the seller. Under LC, the required bank will be obliged to cover the missing payment of the seller. After the payment is made, it is the responsibility of the bank to take payment from the Buyer according to the country law of the buyer.
There are certain conditions where people are not able to get LC due to low credit score or when the supplier does not want to use an LC as a financial guarantee of the transaction. If the person is not able to get LC for the first reason, we can help them in obtaining LC from the concerned department or provide our Federation guarantee since we have tie-ups with multiple countries and one of our major services covers validation of foreign buyers. We validate buyers and we can also provide payment to the exporter on behalf of the buyer and collect the payment from the buyer later. We have customized services for our members and to avail our services or to know more about us you can contact us anytime on the details mentioned on our website.