Letter Of Credit

By Author: Financeseva
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Is a Letter of Credit a loan?

There is a slight difference between loan & Letter of Credit, generally in loan bank directly funds loan amount to borrower account upon agreed EMI to repay principal amount while Letter of Credit work as a promise act that seller payment is well secured for which bank charge certain fee from buyers to issue LC to make the transaction stronger.

Who pays for a Letter of Credit?

The applicant used to pay certain fee charges by banks or financial institutions depending on commercial invoices but generally 1% of contract amount is paid to issue Letter of Credit.

What documents are required for a Letter of Credit?

Banks or financial institutions require certain documents from beneficiaries to submit in order to check all the relevant documents are legally permissible, documents are enlisted below: -

Commercial Invoices
Bill of exchange
Certificate of origin & inspection
License for import/export trading
Insurance policies of certificate
Transport & shipping documents

What is Letter of Credit with example?

Letter ...
... of Credit might sound tricky as it’s often used by international traders to have a fair & confidential transaction making through the bank commitment as it becomes more secure to participate in importing & exporting trade. Let us have a better understanding with the supporting Letter of Credit with example - many of you might think why banks should take the riskier part of transaction & what is the need of it.

Generally, bank or financial institutions don’t issue letter of credit type of complicated guarantees easily they used to do a thorough analysis of buyer's edit history whether he/she is actually creditworthy or not. Even bank charges a certain fee based on sum of amount with taking collateral for the same to ensure risk seems lower.

What is LC and types of LC?

LC Letter of Credit meaning- Bank Guarantees as the word itself say Bank Guarantees, the seller will be given the commitment of payment to be paid within due date even if buyer falls to make payment bank takes the responsibility to do sum of amount as stated in agreement, there are various types of Letter of Credit as given below: -

Acceptance credit
Transferable credit
Untransferable credit
Confirmed LC
Unconfirmed LC
Revocable LC

What is the purpose of the Letter of Credit?

Letter of Credit standby works as a guarantee in the transaction-making process, when it comes to the seller and buyer relationship, it requires trust wherein bank give the commitment on behalf of the buyer that your payment is assured. Once the goods are received payment will be done in time.

What is difference between LC and BG?

LC Letter of Credit & BG Bank Guarantee both are similar & works with the same motive to ensure transaction is taking place in right manner, In LC banks or financial institutions give guarantee to the seller while in BG lenders ensure debtor meet the liabilities even opposite parties fail to make payment ( amount is assured to take in time ).

How much does a Letter of Credit cost?

The cost may vary from 0.25% to 2.00% depending on amount stated in Letter of Credit agreement.

What is LC payment method?

The mode of payment in LC can be varied whether applicant can do online payment via debit card or credit card, net banking, DD in favour of beneficiary.

What is LC BG Credit?

Whether is an LC or BG credit both of them work similarly with the main aim to ensure transactions n wider international traders segment.

How does a bank LC work?

The work of LC is fully transparent, banks & financial institutions give payment guarantee document in terms of making seller fell payment is secured & hence exporting goods can take place.

What does LC 90 days mean?

It’s a sight clause which defines the time period for payment procedure to take place if the letter of credit is made for next 30,60 or maximum 90 days means the importer have sufficient time to do payment.

How do you write LC payment terms?

Writing LC payment terms & conditions is much easier, just you need to ensure below points are mentioned in agreement.

What is LC limit?

One of the core factors considered to determine LC limit is annual consumption of raw materials that to be utilized to purchase goods against LC and such decision shall be taken by issuing bank.

What happens if a letter of credit expires?

LC is a guarantee agreement in which applicant used to mention number of days required to make payment it may be 30,60 or 90 days. If applicant can’t to the payment within agreed time period, then the letter of credit gets expires & eventually bank take the responsibility to make payment.

Who issues the letter of credit?

The bank issues the letter of credit upon buyer request to make in build trust in transaction.

How is LC opening charges calculated?

To get letter of credit buyer required to pay percentage opening charges & it is calculated on the basis of commercial invoices.

What is LC discrepancy charge?

Due to the complexity condition in LC, lenders leverage a charge called discrepancy charge which is determined after evaluating importer creditworthiness.

Can a Letter of Credit be Cancelled?

Generally, a LC is issued in the irrevocable form which can’t be revised or canceled according to the rules & regulations.

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Letter of Credit