Define: Letter Of Credit

A letter of credit is a financial document issued by a bank that guarantees payment to a seller upon the completion of certain conditions specified in the letter.

When a buyer and seller agree to use a letter of credit, the buyer’s bank will issue the letter to the seller’s bank. The seller can then present the necessary documents to the bank to receive payment.

Using a letter of credit provides security for both the buyer and seller. The buyer is assured that payment will only be made if the seller meets the specified conditions, while the seller is guaranteed payment upon fulfilling those conditions.

There are various types of letters of credit, including commercial letters of credit, standby letters of credit, and revolving letters of credit. Each type serves different purposes and has specific terms and conditions.

The specific documents required may vary depending on the transaction, but common documents include invoices, bills of lading, insurance certificates, and inspection certificates.

Yes, a letter of credit can be amended or canceled if both parties agree to the changes. However, any amendments or cancellations must be communicated through the issuing bank.

If the seller fails to meet the conditions, the buyer’s bank will not make the payment. The buyer and seller will then need to resolve the issue through negotiation or legal means.

Yes, a letter of credit can be transferred to a third party if the terms and conditions allow for it. However, the transfer must be approved by the issuing bank.

The validity period of a letter of credit is typically specified in the document itself. It can range from a few weeks to several months, depending on the agreement between the buyer and seller.

While letters of credit provide a level of security, there are still risks involved. For example, if the buyer’s bank becomes insolvent, the seller may face difficulties in receiving payment. It is important for both parties to carefully review and understand the terms and conditions of the letter of credit before entering into the transaction.