Letter of Credit

Topics: International trade, Trade finance, Letter of credit Pages: 1 (319 words) Published: February 12, 2011
Letter of credit
After a contract is concluded between buyer and seller, buyer's bank supplies a letter of credit to seller. [pic]
Seller consigns the goods to a carrier in exchange for a bill of lading. [pic]
Seller p bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for payment from the buyer. [pic]
Buyer provides bill of lading to carrier and takes delivery of goods. A standard, commercial letter of credit (LC) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. The letter of credit can also be source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. In such cases the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version). They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment were insured against loss or damage in transit
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