Letter of Credit (LC) is an arrangement in which bank guarantees payment in agreed currency on behalf. Seller would require presenting certain documents that comply with all LC terms and conditions. This arrangement allows the security of payment to the seller and assurance of safe transaction to the buyer.
HOW IT WORKS
LC is a conditional guarantee of payment in that bank guarantees payment only if specified conditions or terms of credit are met. These conditioners must be agreed upon by both exporter and importer. Also, all necessary documents, including bills of exchange, insurance certificate, packing list, inspection certificate, commercial invoices and transportation bills, must be provided with the shipment.
After shipping goods, the exporter provides all documents to the participating bank for LC settlement. Letter of credit is usually irrecoverable, means it can’t be canceled or amended without the consent of both parties. It assures importer the shipment of right goods and assures exporter that payment will be received once all conditions are met.
Note: That bank deals with documents only. In case the importer is unsatisfied with the received goods, recourse is only through the insurer or exporter.