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LETTER OF CREDIT

Definition: Letter of Credit can be defined as a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

Mechanism of Letter of Credit:



Here we assume that the payment will be made by the advising bank. Here we go ahead to explain the steps:
1. Here there is a contract between the exporter and the customer in which the need for a Letter of Credit is specified.
2. Then the customer requests his bank to issue a Letter of Credit.
3. Customer’s bank then......

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Approximate Word Count: 1989
Approximate Pages: 8 (250 words per double-spaced page)

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