what is latter of cradit how it works?

Answer 1

A letter of credit is much like a credit card, but issued to a particular party and for a particular amount, usually quite large.

For example, imagine a contractor wants to build a building for a real estate developer, a large building. The developer doesn't really know the financial capabilities of the contractor and wants to make sure they can do what they say. Imagine the building is a $1 million building. So the contractor goes to the bank and gets a letter of credit for $1 million so that if the contractor fails to complete the task to the satisfaction of the developer, the developer can draw down on the letter of credit and hire someone else to finish the task. The contractor will owe the writing bank any funds drawn down on that letter.

Answer 2

In simple terms, a letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit.
Its main advantage is providing security to both the exporter and the importer, but the security offered, however, comes at a price and must be weighed against the additional costs resulting from bank charges. The exporter must understand the conditional nature of the letter of credit and the fact that payment will not be made unless the terms of the credit are met precisely.
A letter of credit is opened by an importer (applicant), to ensure that the documentation requestedreflects and proves that the seller has performed under the requirements of the underlying sales contract, by the exporter by making them conditions of the letter of credit (N.B. The sales contract is not an inherent part of the Letter of Credit, although the Letter of Credit may contain a reference to such contract). For the exporter a letter of credit, apart from cash in advance, is the most secure method of payment in international trade as long as the terms of the credit are met.

Answer 3

Dear Tyagi

The letter of credit is an internationally accepted method of settlement of trade payment. To be brief the letter of credit or LC as is commenly known in trade, is an assurance of payment by the banker of the purchaser(importer in case of international transaction) to the beneficiary (the seller, or exporter) up on submission of documents listed in the letter and subject to the terms and conditions and validity of the LC. This gives comfort to the seller about his payment. His payment is guaranteed by a bank rather than by the buyer. Moreover this payment is subject to submission of documents listed in the LC and is not subject to actual receipt of the material.

LC is different from guarantee. Guarantee is operative only up on default by the debtor. Here the LC issuing bank is priamrily liable to make payment for documents presented in conformity with the LC issued by it. This obligation is unaffected by death/insolvency/winding up of the importer /importing company. The only reason on which payment can be refused under LC is if documents are discrepant. Discrepancy will mean either documents not being submitted as required in the Lc or contents of documents not as called for in the LC or other terms (like validity of LC) are not complied with.

The operations interpretations etc of LC are governed by the Uniform Customs and Practices for Documentary Credits, a publication of ICC. This ensures uniform interpretations and well defined rights and liabilities of parties concerned. Courts in general refrain in interfering the LC transactions except in cases of frauds.

Answer 4

Payment Options for Export Import Trade

Part II - Letter of Credit - Essential Information


Letter of credit (L/c) is the most preferred payment option for exporters. Compared to other payment options, L/c has many safeguards for sellers and at the same time assurance for buyers. It is usually issued by larger banks and contain a promise to pay a seller (beneficiary) upon receipt of goods by a buyer if certain conditions outlined in the letter have been met.

What is Letter of Credit ?

Letter of Credit or (L/c) is a legal document to arrange payment between a buyer(importer) and seller (exporter). The bank, as intermediary, ensures security for both parties, giving the exporter confidence that the importer is capable of paying for the goods while assuring the importer that payment will be made to the exporter only after the terms outlined in the letter of credit have been met.

Analysis of typical L/c Transaction

Though a L/c can have great many variations (please see later part of this article) - for simplicity and ease of understanding, I have made a simple step-by-step description of a typical L/c transaction.

Step 1 After successful negotiation on price, specification, quality etc, Buyer selects a seller and places order for specified goods

Step 2 Seller accepts the order

Step 3 Buyer and Seller agrees on terms and conditions of the sale. Buyer instructs its bank to open a L/c incorporating previously agreed terms of sale

Step 4 The buyer's bank prepares a Letter of Credit (L/c), including all instructions to the seller's bank concerning the shipment and sends the L/c to the seller's bank, requesting confirmation. The seller may request confirmation from a confirming bank for added security.

Note: There are often delays at above two steps for various reasons like buyer does not have sufficient funds or seller requests change in L/c terms. Amendments are issued to incorporate changes in L/c terms.

Step 5 The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/c. The seller reviews carefully all conditions in the L/c specially shipment schedule in consultation with his freight forwarder.

Step 6 The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port or airport.

Step 7 Once goods are loaded/shipped, the forwarder completes necessary documentation and hand them over to the seller. The seller then presents the documents to his bank, informing full compliance with terms and conditions of L/c.

Step 8 The seller's bank reviews the documents. If they are in order, the documents are airmailed to the buyer's bank for review and passing necessary documents to buyer. The buyer gets the documents needed to claim the goods.

Step 9 The buyer's bank returns accepted draft and informs buyer. Buyer pays bank.

Step 10 The seller's bank gets payment and pays seller.

The letter of Credit Ensures that:

Payment to the seller will only be made after the terms of the L/c have been met. The documents, which have been reviewed by the bank's experienced staff, are in order. The seller is assured of the buyer's ability to pay and, as a result, a better price and more advantageous terms of payment may be offered.

Is Letter of Credit 100% Safe for Exporters ?

The answer is - yes and no. Yes, if you follow all L/c instructions. No, if you overlook certain pitfalls.

Answer 5

Definition: A letter of credit is an irrevocable payment undertaking of an issuing bank issued to a beneficiary upon request of an applicant for supply of goods, services or performance with documents stated in the letter of credit presented to the issuing bank, a nominated bank or confirming bank, if any, within the expiry date of the letter of credit or within a stated number of days after shipment, where applicable, in full compliance with the terms and conditions of the letter of credit, the applicable UCP and international standard banking practice. It is a legally enforceable obligation or undertaking on the part of the issuing bank and is not a contract (although it is sometimes mistakenly referred to as such).

A letter of credit, often abbreviated as an LOC ,LC or L/C, and also referred to as a documentary credit, often abbreviated as DC or D/C,documentary letter of credit, or simply as credit (in UCP 600 which is effective as from 1st July 2007) is a document issued mostly by a financial institution which provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the credit. This means that once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising of documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to pay irrespective of any instructions from the applicant to the contrary. In other words, the obligation to pay is shifted from the applicant to the LC issuing bank or confirming bank, if any. Non-banks can also issue LC.

The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater 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. Since nowadays almost all letters of credit are irrevocable, (i.e. cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any). However, the applicant is not a party to the letter of credit. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques.

How it works

Let us imagine that a business called Acme Electronics from time to time imports computers from a business called Beijing Computers, which banks with the Shanghai Business Bank. Acme holds an account at Commonwealth Financial. Acme wants to buy $500,000 worth of merchandise from Beijing Computers, who agree to sell the goods and give Acme 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:

* Acme goes to Commonwealth Financial and requests a $500,000 letter of credit, with Beijing Computers as the beneficiary.
* Commonwealth Financial can issue an LC either on approval of a standard loan underwriting process or by Acme funding it directly with a deposit of $500,000 plus fees between 1% and 8%.
* Commonwealth Financial sends a copy of the LC to Shanghai Business Bank, which notifies Beijing Computers that payment is ready and they can ship the merchandise Acme ordered with full assurance of payment.
* On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, Commonwealth Financial transfers the $500,000 to Shanghai Business Bank, which then credits the account of Beijing Computers by that amount.
* Note that banks deal only with documents under the letter of credit and not the underlying transaction.

If the stipulated documents are presented and the terms and conditions of the letter of credit are met, then the issuing bank is obligated to pay under the letter of credit, even if the underlying transaction is not fulfilled.

Also the bank is not required to pay if the stipulated documents are not presented or the terms and conditions of the letter of credit are not met, even if the underlying transaction was fulfilled.

Answer 6

Pl get your spelling right first !
Its "Letter of credit"