Letter of Credit
A letter of credit is a bank commitment assuring that the beneficiary will receive a certain payment against presentation of credit complied documents which proves that the products have been shipped or the service has been completed within the stipulated period.
When two companies located in two different countries do trading without knowledge of each other’s financial state or business performance, it prevents the parties from sustaining losses due to failure to fulfill the liabilities of the contract between them. It is a written commitment for the payment in return to the presentation of the documents in conformity with the L/C terms and conditions.A letter of credit provides certain advantages to the buyer and seller both.
For the buyer:
- The bank examines whether the conditions for the letter of credit have been met, and it does not make payment to the seller without conformity.
- It ensures that the goods are loaded according to the contract conditions and on the due date.
To the seller:
- It is an irrevocable undertaking to pay against presentation of credit complied documents to the bank.
- Taking advantage of convenient access to finance.