HOW A LETTER OF CREDIT WORKS

Paybells   3:44 AM

How a Letter of Credit Works

Protection for Payments

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By Justin Pritchard

Updated November 18, 2016

A letter of credit is a document from a bank that guarantees payment. While there are several types of letters of credit, they are often used when buying and selling: if a buyer fails to pay a seller, the bank that issued a letter of credit will pay the seller (assuming all requirements are met).

Letters of credit can also protect buyers. If you pay somebody to provide a product or service – and they fail to deliver – the buyer might be able to get paid using a standby letter of credit.

That payment can serve as a penalty to the company that failed to perform, and it’s similar to a refund, allowing the buyer to pay somebody else to provide the product or service needed.

If you're familiar with escrow services, the concept is similar: banks act as "disinterested" third parties (they don't take anybody's side), and they release funds only after certain conditions are met. Letters of credit are common in international trade, but they are also used in domestic transactions (such as construction projects).

Key points:

• A letter of credit provides protection for sellers (or buyers)
• Banks issue letters of credit when a business “applies” for one and has the assets or credit to get approved
• Letters of credit are complicated, and it’s easy to make an expensive mistake when using one

Example

TYPES OF L/C

TYPES OF L/C

Paybells   12:13 AM

Types of Letters of Credit

A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

A revolving letter of credit lets the customer make any number of draws within a certain limit during a specific time period. A traveler’s letter of credit guarantees the issuing banks will honor drafts made at certain foreign banks.

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.

Read more: Letter Of Credit https://www.investopedia.com/terms/l/letterofcredit.asp#ixzz54i79n2qd
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REQUIRED DOCUMENTS OF L/C

REQUIRED DOCUMENTS OF L/C

Paybells   3:11 AM

Documents that may be Requested for Presentation[edit]

To receive payment, an exporter or shipper must present the documents required by the LC. Typically the letter of credit will request an original Bill of lading as the use of a title document such as this is critical to the functioning of the Letter of Credit. However, the list and form of documents is open to negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin or place. Typical types of documents in such contracts might include:^{[citation needed]}

• Financial documents — bill of exchange, co-accepted draft
• Commercial documents — invoice, packing list
• Shipping documents — bill of lading (ocean or multi-modal or charter party), airway bill, lorry/truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt
• Official documents — license, embassy legalization, origin certificate, inspection certificate, phytosanitary certificate
• Insurance documents — insurance policy or certificate, but not a cover note.

But the range of documents that may be requested by the applicant is vast, and varies considerably by country and commodity.

TYPES OF LETTER OF CREDIET

TYPES OF LETTER OF CREDIET

Paybells   11:10 PM

Types of Letters of Credit

A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

A revolving letter of credit lets the customer make any number of draws within a certain limit during a specific time period. A traveler’s letter of credit guarantees the issuing banks will honor drafts made at certain foreign banks.

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.

WHAT IS L/C

WHAT IS L/C

Paybells   10:31 PM

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What is a 'Letter Of Credit'

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

LETTER OF CREDIET

LETTER OF CREDIET

Paybells   4:30 AM

Letter of credit

From Wikipedia, the free encyclopedia

[hide]This article has multiple issues. Please help improve it or discuss these issues on the talk page. (Learn how and when to remove these template messages) This article needs additional citations for verification. (July 2013) This article needs attention from an expert on the subject. The specific problem is: Much uncited material. Confusing. Self-published sources. Difficult to find good sources.. (October 2012) This article may require cleanup to meet Wikipedia's quality standards. The specific problem is: large tracts of unreferenced texts (November 2014)

After a contract is concluded between a buyer and a seller, the buyer's bank supplies a letter of credit to the seller.

Seller consigns the goods to a carrier in exchange for a bill of lading.

Seller provides the bill of lading to bank in exchange for payment. Seller's bank then provides the bill to buyer's bank, who provides the bill to buyer.

Buyer provides the bill of lading to carrier and takes delivery of the goods.

In modern business practice, a letter of credit (LC) also known as a Documentary Credit, is a written commitment by a bank issued after a request by an importer(foreign buyer) that payment will be made to the beneficiary (exporter) provided that the terms and conditions stated in the LC been met, as evidenced by the presentation of specified documents.^[1]

A letter of credit is a method of payment that is an important part of international trade. They are particularly useful where the buyer and seller may not know each other personally and are separated by distance, differing laws in each country and different trading customs.^[2] It is generally considered that Letters of Credit offer a good balance of security between the buyer and the seller, because both the buyer and seller rely upon the security of banks and the banking system to ensure that payment is received and goods are provided.^[3] In a Letter of Credit transaction the goods are consigned to the order of the issuing bank, meaning that the bank will not release control of the goods until the buyer has either paid or undertaken to pay the bank for the documents.

In the event that the buyer is unable to make payment on the purchase, the seller may make a demand for payment on the bank. The bank will examine the beneficiary's demand and if it complies with the terms of the letter of credit, will honor the demand.^[4] Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs and Practice for Documentary Credits.^[5] The current version, UCP 600, became effective July 1, 2007. Banks will typically require collateral from the purchaser for issuing a letter of credit and will charge a fee which is often a percentage of the amount covered by the letter of credit.

Contents

  [hide] 

• 1Origin
• 2Terminology
• 3Types
• 4International Trade Payment methods
• 5Process
  • 5.1Pricing
  • 5.2Documents that may be Requested for Presentation
• 6Risk situations
• 7Legal principles
  • 7.1Legal basis
• 8See also
• 9References
• 10External links