What is a Letter of Credit and How it Works?
In the arena of international trading, a letter of credit (LC) is a vital financial tool that helps streamline the export-import process and build credibility. To define, it is a letter from a reputable bank or financial institution that guarantees the exporter will receive payment from the importer on time and for the right amount as agreed upon. In case the importer is unable to make the purchase payment, the responsibility of paying the full or remaining amount rests upon the bank extending such a letter of credit. Herein, the bank serves as an “impartial” third party whose key purpose is to ensure payment protection and facilitate hassle-free international trade process. There are specific conditions and obligations that the client must meet to get an LC from the bank. Similarly, the payment is released only when certain conditions are fulfilled. Taking into consideration the complexity of international trade finance – varying laws prevalent in the countries, distance an...