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Letter Of Credit (LC)

A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount. The bank that writes the letter of credit will act on behalf of the buyer and make sure that all delivery conditions have been met before making the payment to the seller. Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs and Practice for Documentary Credits. Letters of credit are typically used by importing and exporting companies particularly for large purchases and will often negate the need by the buyer to pay a deposit before delivery is made. To receive payment, an exporter or shipper must present the documents required by the LC. Typically, the payee presents a document proving the goods were sent instead of showing the actual goods.
Typical types of documents in such contracts include:

  • Financial Documents — Bill of Exchange, co-accepted draft.
  • Commercial Documents — Invoice, packing list.
  • Shipping Documents — Transport document, insurance certificate, commercial, official or legal documents.
  • Official Documents — License, embassy legalization, origin certificate, inspection certificate.
  • Transport Documents — Bill of lading (ocean or multi-modal or charter party), airway bill, lorry/truck receipt, railway receipt, CMC other than mate receipt, forwarder cargo receipt.
  • Insurance documents — Insurance policy or certificate, but not a cover note.

Issuance charges, covering negotiation, payback and other charges are paid by the applicant or as per the terms and conditions of the LC. If the LC does not specify charges, they are paid by the Applicant.