Letter of Credit? – Features, Types, Benefits & How to Apply

Understand what a letter of credit is and its features, importance, types, how to use a Letter of Credit and the documents needed to apply for a letter of credit.

Being a global trader, you may have come across the term “Letter of credit”. You often wonder what is letter of credit, how letter of credit works, and why global traders need it. This Letter of credit guide can help you get your answers.

What Is A Letter Of Credit?

Do you want to know what is LC?

Also known as “Payment Guarantee Letter”, “Credit Letter”, or “Documentary Credit Letter”, an international Letter of Credit is issued by a bank or financial institution as a legal document guaranteeing an on-time buyer’s payment to the seller in a global trade deal. In the event, if the buyer defaults ie. is unable to pay or perform the T&C of the contract, the issuing bank will reimburse the full or the remaining amount on behalf of the buyer.

What Is The Need For Applying For A Payment Guarantee Letter?

International trade deals are often influenced by various overseas factors such as distance, countries differing in-laws, and lack of familiarity of parties to the contract, etc., making them a little bit risky for global importers & exporters. The importers are not willing to pay the exporters until the goods are shipped from foreign ports to their destination while the exporters demand payment as the shipment takes place to further avoid their risk of non-performance.

This LC guide will help you know how a letter of credit in international trade works as an appropriate, suitable & reliable payment mechanism for global traders. The issuing bank, on behalf of its customer ie. the buyer/importer, assures sellers/exporters that they will get the payment for their rendered services in international trade.

This is one of the features of letter of credit that the buyers are assured that the sellers will be paid after presenting shipment documents while the sellers have peace of mind of getting payment, regardless of the buyer’s capability to pay or perform, as the trade deal is backed by the issuance of a LOC. Now you know that under an LC, both importers & exporters are sure about LC payment.