Basically, a letter of credit is meant to act as a pledge to pay. Usually the letters of credit is abbreviated as L/C, LC or LOC. They are normally issued by banks as a way that ensures the sellers that their payment will be made once they accomplish what they have agreed to do. Basically, there are two common types of L/C: standby as well as commercial. The commercial letter of credit is normally the primary form of making the payment for given transactions while the standby is the secondary form of making the payment. The letter of credit are normally practiced in international trade and the banks play the role of an uninterested party between the seller and the buyer. Besides, they act as a form of protection to the exporters as well as importers. Due to communication problems across different time zones as well as thousands of miles, letters of credit lays out the details to ensure that everyone is on the same page.
In the context of letters of credit, the buyer is the applicant while the beneficiary is the seller or the ultimate recipient of funds. The issuing bank is that bank which pledges to make the payment while the advising bank is that which offers a helping hand to the beneficiary to use the letter of credit. The L/C will only be issued by the bank if it is certain that the buyer will make the necessary payment. In most cases, the buyer has cash in the bank which is enough to cover the L/C while others use a line of credit with the bank. Before entering any form of trade agreement with any buyer, it is recommended that the sellers should ensure that the bank issuing the L/C is legitimate in order to be secure.
In the context of letters of credit, the buyer is the applicant while the beneficiary is the seller or the ultimate recipient of funds. The issuing bank is that bank which pledges to make the payment while the advising bank is that which offers a helping hand to the beneficiary to use the letter of credit. The L/C will only be issued by the bank if it is certain that the buyer will make the necessary payment. In most cases, the buyer has cash in the bank which is enough to cover the L/C while others use a line of credit with the bank. Before entering any form of trade agreement with any buyer, it is recommended that the sellers should ensure that the bank issuing the L/C is legitimate in order to be secure.
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