Letter of credit

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When involved in more complex or riskier international trade operations, a buyer or seller may want to take extra steps to secure and guarantee delivery or payment and to do so they will commonly rely on a bank issued Letter of Credit (LC, LOC, L/C).
Letter of credit definition:

  • A Letter of Credit is a financial document issued by a bank on behalf of a buyer.
  • It guarantees that payment will be made to the seller upon presentation of specified documents and compliance with agreed-upon terms and conditions.
  • It serves as a secure method of facilitating international trade transactions by mitigating payment risks for both the buyer and the seller.

In plain English – a Letter of Credit is a promise of a bank to pay a seller on behalf of a buyer once certain specific delivery conditions are met.

Expand on this Letter of Credit definition with our article What is a Letter of Credit, here – or take our eLearning course here.

You can find below a simple process flow for the most common types of Letters of Credit:

A simple process flow, showing what a letter of credit is and how a letter credit works. It shod all LC steps from the sales contract, the request of the LC to the issuing bank, its approval, its transmission to the seller via the advising bank. The provision of documents by the seller to the banks for review and finally the possible amendment of documents and the payment of the buyer to the seller through the issuing bank. The 13 steps of a Letter of Credit process.
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