it is related to the financing of the funds for the company from the banks.
2007-02-22 19:37:14 · 6 answers · asked by Anonymous in Science & Mathematics ➔ Astronomy & Space
A letter of credit is a promise from your bank to meet any funds you may owe on a transaction. For instance, if you buy something and wish to import it to your country, your bank, providing you have the funds, will issue you a letter of credit to present to your creditor, and he can be assured of payment when the transaction is finalised.
2007-02-22 19:43:13 · answer #1 · answered by Anonymous · 2⤊ 0⤋
It's a letter from a bank stating how much credit they will give to you. It's used for large financing of things where they person does not get the money in advance and pay interest. Instead it's simply a promise from a bank that they will give you so much money.
If you run a company and you want to buy say 1,000,000 DVD burners from a manufacturer in China you get a letter of credit from the Bank that states they will loan you up to 100 Million dollars and then the company in China knows you have enough money to buy their product and strikes a contract based on this promise.
Then you agree on a final price, say $40 million for the 1,000,000 DVD drives and once you do that the Bank issues you a loan for $40 million.
The thing here is that you will have to pay the bank $300,000 in interest on that loan 30 days after they issue the loan.
So that $40 per unit price jumps to $45 dollars at the end of the first year because of all the interest you pay.
Banks give verbal letters of credit to common people for common items, such as car loans. The bank will tell you how much they will finance today and at what interest and then you go to the car dealer and pick a car within that amount and then let the bank know and they issue you a check for it to the dealer.
Letters of credit are a formailty for large purcheses in millions of dollars.
They are done so that people can start businesses without first getting the loan and having to pay interest without committments from suppliers and such.
2007-02-23 09:00:45 · answer #2 · answered by Anonymous · 1⤊ 0⤋
Importer giving an written assurance to exporter in other words
buyer giving an written assurance to seller through their bank
standard format for the same is known as letter of credit.
2007-02-23 06:01:18 · answer #3 · answered by monkey 1 · 0⤊ 0⤋
The short for of it is LOC. When you export any thing you can get upto 85-90% payments from the Bank.
2007-02-23 07:23:05 · answer #4 · answered by khuranapvp 3 · 0⤊ 0⤋
It is for export of goods. You can take loan against LC from your bank. LC is issued by buyer as acceptance of finance for purchases.
2007-02-23 07:15:53 · answer #5 · answered by Anonymous · 0⤊ 0⤋
giving money on intrest
2007-02-23 03:42:26 · answer #6 · answered by hari krishna 2 · 0⤊ 1⤋