A letter of credit (L/C) is a widely used payment method in international trade, providing security for both the exporter and importer. It is a guarantee issued by the importer’s bank, assuring that the payment will be made to the exporter upon fulfilling the specified conditions.
1. Definition and Parties Involved:
A letter of credit involves four main parties: the importer (applicant), the importer’s bank (issuing bank), the exporter (beneficiary), and the exporter’s bank (advising bank). These four entities work together to ensure the payment process is secure.
2. Types of Letters of Credit:
Letters of credit can be revocable, irrevocable, confirmed, or unconfirmed. Each type is chosen based on the nature of the transaction and the level of security required. Irrevocable letters of credit are the most common, as they provide a firm payment guarantee.
3. Letter of Credit Process:
The process begins with an agreement between the importer and exporter. The importer then requests their bank to issue a letter of credit in favor of the exporter. Once the necessary documents and goods are delivered, the payment is made to the exporter.
