Issuance of letter of credit

Letter of Credit

A letter of credit (LC) is a document issued by a financial institution, or a similar party, assuring payment to a seller of goods or services provided certain documents have been presented. The commitment of payment by the issuer is primarily dependent upon the creditworthiness of the issuer. An irrevocable letter of credit is one that cannot be amended or cancelled without the consent of the buyer and the seller. To be negotiable, the letter of credit must be irrevocable. This type of assurance is one of the most popular methods for buyers and sellers to engage in international trade.

What is a Negotiable Instrument?

A negotiable instrument is a document or instrument of payment transferable by delivery or by endorsement and delivery. Some of the most common examples of negotiable instruments are checks, money orders and certificates of deposit. Negotiable instruments are often used to facilitate commercial and financial transactions, to provide security, and to eliminate some of the risks associated with transacting business.

A negotiable instrument can be either bearer or order. When an instrument is issued in bearer form, it may be transferred without endorsement or delivery. When it is issued in order form, it must be transferred by endorsement and delivery. The holder of a negotiable instrument can transfer title to a third party by simply endorsing it and delivering it to that party. If the instrument is a check, it must also be accompanied by a duly-authorized signature.

Reasons for Raising a Letter of Credit

There are two primary reasons for which a letter of credit may be raised:

1) To provide security to both parties that the transaction will be completed in accordance with the terms and conditions of the contract. This provides the seller with assurance that payments will be received and the buyer with assurance that title to the goods will be received.

2) To provide financial assurance to the seller if the buyer is unable to pay. In such cases, the letter of credit can be presented to the bank by the seller, who can then be assured of payment upon compliance with the terms and conditions of the letter of credit.

Advantages of Raising a Letter of Credit

The advantages of raising a letter of credit include:

1) Security: A letter of credit is an assurance that payment will be made to the seller upon presentation of the required documents and compliance with the terms and conditions outlined in the letter of credit. It also provides the buyer with assurance that title to the goods will be received when payment has been made.

2) Flexibility: The terms and conditions of a letter of credit can be tailored to a buyer’s needs and budgetary constraints.

3) Certainty: A letter of credit ensures Reimbursement for the buyer upon production of documents and compliance with its terms and conditions. It is also a method of settling payment disputes that may arise during the course of the transaction.

When Should a Letter of Credit Be Used?

A letter of credit should be used when it is difficult to determine the creditworthiness of the buyer. It should be used if it is uncertain that the buyer will be able to fulfill the terms of the contract and make the required payments. Letters of credit should also be used by buyers who are purchasing goods or services from a foreign supplier and wish to ensure payment is made to the seller in the event of a dispute.

Letter of Credit

A letter of credit (L/C) is a document provided by a bank issued at the request of a customer that guarantees payment for goods or services purchased by the recipient. It is an irrevocable agreement between the issuing bank (also known as an importer) and the receiving party (also known as an exporter) that states that the bank will pay the confirmed amount to the exporter upon presentation of all the required documents by the exporter. The payment is made by the bank on behalf of the importer and the creditworthiness of the bank is what will guarantee the payment.

In order to open a letter of credit, certain information must be provided by the importer, such as the specific terms of the transaction, including a description of the goods or services being provided, the date of purchase, and the date of delivery. The exportation must also provide information about the delivery, including where the goods will be shipped, the weight and dimensions, the payment terms, and any special conditions that must be met by the importer, such as insurance or inspection of the goods before delivery is made.

In addition, the importer must provide sufficient financial information to enable the bank to determine the amount of the letter of credit. This is usually determined by the total cost of the goods or services being delivered, plus any fees that may be required by the bank. The amount of the letter of credit is then determined by the bank and is typically equal to or less than the value of the goods or services being purchased.

Once the letter of credit is established, the bank pays the exporter on behalf of the importer when all of the terms and conditions of the transaction are met. This payment is then drawn on the importer as a debt, and the importer is responsible for repaying the bank. This provides a safe and secure form of payment that protects both the exporting and importing parties.

In summary, a letter of credit is an important document that guarantees payment for goods or services received by the party ordering them. It provides the importer with proof of payment and the exporter with protections against non-payment, and is essentially a guarantee from the bank that the importer will be able to fulfill the terms of their agreement.