Letter of Credit is a written commitment to Pay given by Buyer or Importer’s Bank(issuing Bank) to Exporter or Suppliers Bank (accepting or paying Bank). In other words LC is a Bank guaranteeing that Buyer would pay certain amount after certain period of time only if terms and conditions mentioned on Letter are fulfilled. In casethe Buyer is not able to pay its supplier thenissuing Bank would pay theSupplier on behalf of the Buyer.
Bank usually perform a credit assessment for its customers Credit before issuing LC as it becomes Bank liability to pay supplier in case if Buyer is not able to make payment on Time.
LC is used mostly in International trade and in domestic market as well. It is internationally recognised guarantee of payment document used to bring trust and facilitate trade transactions.
Letter of Credit is of various types:
- Revocable LC
- LC can be modified any time by Buyer or Issuing bank
- Irrevocable LC
- LC cannot be modified unless all parties agrees
- Sight LC
- In sight LC, payment has to be made as soon as the documents have been presented and Verified
- Usance (term)LC
- In Usance LC, payment is made at predetermined time or future date after conforming documents are presented.
- Standby LC (SBLC)
- SBLC is an irrevocable documentary commitment given by issuing bank to third party beneficiary. It is a promise given by issuing bank to third party to pay on behalf of applicant, a specific sum of money against a demand from the beneficiary provided the terms and conditions of the SBLC (if any), are fulfilled.
5 things to know about Letter of Credit format are
- In letter of credit, type of LC, terms of payment has to be mentioned in addition to details of Issuing Bank and Advising Bank (name and address) along with their swift code
- While applying for Letter of Credit, check list is to be maintained. If any points are not adhered properly then importer or exporter may face certain problems in deal.
- Most Important, it includes Importer’s and Exporter’s details (name and address) along with Amount, Tenure of payment, charges and Payment terms and conditions
- It includes details of Shipping i.e. expected date of shipping, where shipment is coming from and where it is going to be delivered.
- It also includes complete details about the product including quality, quantity, size, materials and many more.
Is suppliers Credit the Most Trending thing now?
Yes it is.
After RBI banned Letter of Undertaking (LOU) backed Buyer’s Credit,currentlythe best available option with Importers to avail Import financing is Suppliers Credit.
It is almost similar to Buyer Credit but thekey difference is that in Suppliers Credit, Letter of Credit is required (mandatory).