What Is A Letter Of Credit And Its Purpose?


6 Answers

hirra pervaiz Profile
hirra pervaiz answered
A letter of credit can be defined in a variety of ways; however the most accepted definition of Letter of Credit is given in the Article 2 of Uniform Customs and Practices 500.

In the simplest of form the letter can be defined as that it is a non funded facility whereby a bank on behalf of its customers agrees to pay, or accept bill of exchange or authorizes another bank to pay or accept bill of exchange or negotiate provided the terms and conditions are complied with.

The main purpose of letter of credit is to facilitate international trade. it is because of this that the exporter and importer can come along because the bank serves as a major guarantor thus facilitating the whole trading process and the chances of default and risk is low. Moreover it is because of this letter of credit that the exporter gets prompt payment for his goods as he can negotiate with nay negotiating bank and get his payment and on the other hand the importer remains satisfied that the exporter cannot breech the contract because he has a strong guarantor which allows the trust of the exporter in the business as well. Thus both are beneficial in the end and ultimately the purpose of a letter of credit is accomplished that it facilitates the trade between the two parties.
Anonymous Profile
Anonymous answered
A Credit letter of any business transaction is usually issued by a bank or similar financial institutions to assist in safeguarding the interests of all parties involved in any transaction, usually a buy and sell agreement. The letter of Credit implies the financial institution’s active role in assuring the seller of the buyer’s good intentions on the transaction.
Anonymous Profile
Anonymous answered
Letter of Credit (Letter of Credit, L / C), is the issuing bank should be the applicant's request in accordance with its instructions to the third contained a certain amount of prescribing, in a certain period of time with the required payment documentation file a written guarantee. Letter of credit is the most important international trade, the most common method of payment.  Letter of credit has three characteristics:  One is not dependent on credit sales contract, a single bank in the trial, stressed that the basis of trade credit and formal separation of the written certification;  Second, the credit voucher payment is not subject to the goods. As long as the documents in line with the issuing bank should be unconditional payment;  Third, the letter of credit is a bank credit, which is a bank guarantee documents.  Letters of credit (referred to as L / C) payment, with the development of international trade, banks involved in international trade settlement process evolving. Because the purchase price paid to obtain the shipping documents meet the credit requirements for the condition, avoiding the risk of payment in advance, so the letter of credit payment to a large extent solved the import and export of both payment and delivery issues in the conflict. It has become a major international trade payment.  Of the sellers, L / C provided the greatest benefit is a reliable accountant - the payer, that is, banks, and is designated a major bank. If he got the L / C does not meet the sale and purchase agreement, he can terminate the contract but not delivered, an additional claim (if the market use of losses). If you meet the sale and purchase agreement, and not particularly difficult to meet the requirements, he got after doing some looking to do matters as the boat, the last day before the contract requires delivery of a number of varieties of goods shipped out, and then obtain a set of documents, including the most important bill of lading (B / L), can reach a settlement. L / C requirements are generally clean B / L, required B / L content and L / C contents of the agreement. Therefore, the seller should be in strict accordance with the contract on time and shown with consignment, or get with the L / C inconsistent B / L can not be a settlement.  Sale and purchase agreement and the L / C will not require dirty B / L is also acceptable, because what is unclean B / L the scale difficult to determine, if all the rot that is unclean B / L, but only one small damage in the millions of dollars of transactions in looks nothing. After all, there can be endorsed, is unclean B / L, as usual reason this should not affect the settlement, because it was within acceptable levels, the buyer should not be impugned. But the problem is not here, agreed in advance, perhaps modify the L / C or the buyer to tell banks what is wrong with the files that L / C is still acceptable, does not affect the money. Who can know in advance what the future will be lost, to what extent, what to comment? Moreover, just as the buyer to buy a good line, that is, to clean B / L, rather than the claims. Not have the endorsement would be in B / L above the so-called printed: The surface in good condition. As long as the shipper to get this B / L (also called "clean" bill of lading) in order to ensure that to the bank settlement can surely got the money. So, L / C to the seller to provide a reliable accountant, sellers use L / C is basically like the world to do business with any buyer. He did not know whether the buyer know, keep its promises, and regardless of whether the place where the buyer and the political stability of foreign exchange controls, and even regardless of whether the buyer will immediately close down and so on. Anyway, he believes that the bank, with L / C to the settlement, the banks must pay.  Advantage of the buyer is to pay shipping out before he. As long as both sides honest business, and buyers will not take much risk. Because at least the seller has really delivered the goods, and got on board bill of lading (B / L), and the number of them, date and surface conditions is consistent with the sale and purchase agreement. Unlike mail order, the buyer paid for later, even a document nor a buyer not really sure whether or not goods in the end by post. Now, with the B / L, the buyer can see all the conditions of the contract have been fulfilled, he was released by the bank money.  Of course, buyers can also L / C in the provisions of this voyage and other documents they need. Various trade a variety of different documents, if the imported food products, buyers on Keneng to Jianyanbaogao, which can be L / C li states, write up Hou, Wen Jian Lai Bank Jiuyaogenju entire settlement. In this way, buyers get the entire file, you can wait for getting goods, and after customs, taxes and other import procedures also easier to handle.  Buyers also can L / C requiring banks to provide credit assistance. International trading of millions of dollars easily, and expensive. VIP immediately made money or out of the sale, even if large companies can also cause financial tension, so often do on bank loans. In particular, some small companies do not have enough strength and big sale, but he was familiar with the bank tends to support it. Buyers open L / C, as long as the value of the buyer to buy the goods within certain limits, can go to the familiar bank to open L / C, without the need for other special guarantees.  Bank through the L / C of this, buyers will not have the money or very little money to do large transactions, you can open 4 million U.S. Dollars of the L / C to buy the ticket goods. If such goods to the port of destination before giving money to buyers, sellers often do not agree, even if agreed, the buyer is also able to stand out 4 million yuan of guarantee (to ensure delivery to the discharge port on the payment) is not so simple, but 4 million yuan in the L / C on the contrary, it will easily open to. Buyers do need one day to four million U.S. Dollars in exchange for documents, but that was what happened a few months later. Ship to the destination port city will take some time, during which the sale will generate a lot of the second - the entire ticket buyers can transfer or sell this ticket goods in batches to obtain money, naturally do not worry about changing back to a document.  Use of the entire international trading L / C payment method that can reduce the many costs and save a lot of trouble. Many transactions are able to reach through several telex, does not require you to do more work, thus reducing costs and time. One is the investigation costs - by L / C, sellers do not need to investigate the buyer's credit will be able to deal. Otherwise, hundreds of tens of millions of how the contract can use some power coming solution?
Nouman Umar Profile
Nouman Umar answered
A letter of credit is a document which is used between the two parties for the providing the security and undertaking on the behalf of the parties that they will fulfill their obligations. The abbreviation of the letter of credit is the LC and it is commonly used in the import and export of the business. It is also known as the documentary credit. The beneficiary requests his bank that he favors the issuing bank to provide the letter of credit in the favor of the beneficiary and on the behalf of the person sending the letter of credit to the business.

The letter of credit is used for making the payment between one parties to other party which are doing in the business international level. So the deal between the two parties belonging from different countries can be making through the letter of credit by involving the banks to the parties. The bank gives the guarantee of the importer that he will make payment to the importer bank so that he can easily transact their goods from one country to another country. Due to high boom in the international trade then the importance of the letter of credit is increasing day by day. So this is very common type of business.
Sajid Majeed Profile
Sajid Majeed answered
A letter of credit is a means of marketing payments for the import of goods. It is issued by the buyer's bank in favour of seller. All terms and conditions are stated in it.
The person who purchases the goods from the other country is called buyer and he requests for opening L.C.

Exporter is the person in whose favour, the L.C is opened. He is also called seller.
It is the bank which issue the letter of credit. It is also called issuing bank.
The bank which makes payment to the exporter after receiving the L.C is called paying bank.International trade is financed by L.C, which is quite simple; following is the procedure of L.C.

If the exporter of any country wants to sell any commodity to the importer of other country, he settles with the seller about the prices, quantity and quality of goods and modes of making payment. They will do arrangements.

The bank will ask the applicant to provide import licence and Performa invoice.
The bank will provide a printed application form, if it found that all the documents are correct. The importer will submit an application form with necessary details discussed between importer and exporter, like shipment, insurance and total value of goods. The applicant will request the bank to open an L.C in favour of exporter.

The L.C form is filled by the banker as per information of applicant and all terms and conditions are stated in the form. The bank can open L.C because they are authorized dealer in foreign exchange.
Anonymous Profile
Anonymous answered
A l/c is a that docment which opning by purchase of goods  and make payment to seller

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