Saturday, February 19, 2011

What is Letter of Credit

Letter of Credit
A Letter of Credit (LC) is one of the most widely used modes of settling payment between international buyers and sellers.

Irrevocable letter of credit: Irrevocable credit cannot be altered or modified without the consent of all the parties i.e. the opener, the opening bank, the confirming bank and the bank beneficiary.

Confirmed L.C: The exporter's bank gives undertaking to honor the draft. The exporter gets assurance of payments form the issuing and advising bank.

Unconfirmed L.C: The bank through whom the credit is negotiated, the advising bank does not give any guarantee to the exporter that the bill drawn will be honored by the issuing bank. The unconfirmed L.C is a commitment of the issuing bank to honor the draft.

Documentary L.C: A documentary L.C is one which provides for bills to be accompanied by the documents of title to goods.

Revocable letter of credit: A revocable L.C can be canceling or modified without the consent of all the parties. The issuing bank can inform the advising bank for any change in the L.C. The seller can face the problems of obtaining payment directory form the buyers.

Documentary collection or draft:
The exporter sends the document to the importer’s bank, once shipment is made, and importer pays and gets the documents for release of shipment.

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