Letters of Credit (LCs)
A letter of credit is a bank-issued document that guarantees payment to a seller upon fulfilment of specific conditions. It is a crucial tool in international trade.
Types of LCs:
- Revocable LC: Can be amended or cancelled by the issuing bank without notice.
- Irrevocable LC: Cannot be modified without the consent of all parties.
- Standby LC (SBLC): Acts as a backup payment mechanism.
- Sight LC: Payment is made immediately upon presentation of documents.
- Transferable LC: Can be transferred to a third party.
LC Process:
- Buyer applies for an LC from their bank.
- Issuing bank sends the LC to the seller’s bank (advising bank).
- Seller ships goods and presents required documents to the advising bank.
- Advising bank verifies documents and pays the seller.
- Advising bank sends documents to the issuing bank.
- Issuing bank reimburses the advising bank and collects payment from the buyer.