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A letter of credit is a guarantee of payment issued by a bank to a beneficiary. If the applicant does not fulfill its obligations, the issuing bank pays the beneficiary. For example, a company applies to its bank for a letter of credit to purchase radios from a Korean manufacturer. If the company does not pay, the issuing bank will pay the manufacturer. There are different types of letters of credit such as revocable, irrevocable, standby, and revolving that vary in whether they can be cancelled and the conditions for payment.
A letter of credit is a guarantee of payment issued by a bank to a beneficiary. If the applicant does not fulfill its obligations, the issuing bank pays the beneficiary. For example, a company applies to its bank for a letter of credit to purchase radios from a Korean manufacturer. If the company does not pay, the issuing bank will pay the manufacturer. There are different types of letters of credit such as revocable, irrevocable, standby, and revolving that vary in whether they can be cancelled and the conditions for payment.
A letter of credit is a guarantee of payment issued by a bank to a beneficiary. If the applicant does not fulfill its obligations, the issuing bank pays the beneficiary. For example, a company applies to its bank for a letter of credit to purchase radios from a Korean manufacturer. If the company does not pay, the issuing bank will pay the manufacturer. There are different types of letters of credit such as revocable, irrevocable, standby, and revolving that vary in whether they can be cancelled and the conditions for payment.
A Letter of Credit (LC) is a document issued by your bank that essentially acts as an irrevocable guarantee of payment to a beneficiary. This means that if you do not perform your obligations, your bank pays. The letter of credit can also be the source of repayment of the transaction meaning that the exporter will get paid with the redemption of the letter of credit. Example: For simplicity sake lets imagine that your company imports radios from a Korean manufacturer called Seoul Manufacturin, which banks at !irst Seoul "an#. Your company currently banks at !irst $merican "an# For the purpose of this example these will be the roles that the parties will play in the letter of credit transaction: %our company : applicant Seoul Manufacturin : beneficiary !irst $merican "an# : &ssuin "an# !irst Seoul "an# : $dvisin "an# The example: You want to buy !",""" worth of radios from #eoul $anufacturing, which agrees to sell the merchandise and gi%es you &" days to pay it with the condition that you pro%ide them with a '" days letter of credit for the full amount. The steps to get the () would be as follows: ')You go to First American *ank and re+uest a !",""" letter of credit with #eoul $anufacturing as a beneficiary. ()The bank goes through its underwriting process. Although the bank is not ad%ancing money, they are extending credit on your behalf and are taking on a contingent liability. ,f your company +ualifies from a credit standpoint the () is issued. ))-%en if your company does not +ualify for credit, you can still get an () if you are willing to put cash collateral ). secured letters of credit are %ery common for small business . *)The bank sends a copy of the letter of credit to First #eoul *ank, which lets the %endor knows and the merchandise is shipped. Take into consideration that the letter of credit itself might be the source of repayment of he transaction. ,t could be that #eoul $anufacturing is interested in getting paid as soon as the merchandise is shipped. Therefore, the letter of credit will indicate that payment shall be made as soon as #eoul $anufacturing can present proof of shipping. ,f the letter of credit that your %endor re+uires is not tied to a particular transactions, but they are asking for a guarantee that makes sure that you will not default. They are probably asking for a Stand+"y letter of credit or a ,evolvin letter of credit. These types of ()s are usually for a longer term. /sually a year and are the %endor0s guarantee that they will get paid. The example abo%e describes the simplest of letter of credit transactions. Although there are other factors in%ol%ed such as the role of correspondent banks and confirmations, the thing that you should be concerned as a customer is expediency and the fees in%ol%ed, which can run anywhere from 1.!2 to 32 of the %alue of the () -%.ES /! LE--E,S /! C,E0&- ,evocable letter of credit 4ust like the name says the () can be re%oked by the ,ssuing *ank without the agreement of the beneficiary. &rrevocable letter of credit )an not be cancelled or amended without all the parties agreement. Standby letter of credit 5uarantee of payment. ,f the beneficiary does not get paid from its customer it can then demand payment from the *ank by forwarding the copy of the in%oice that was not paid and supporting documentation. ,evolvin letter of credit ,t is established when there are regular shipments of the same commodity between supplier and customer. -liminates the need to issue an () for each indi%idual transaction
A Short View of the Laws Now Subsisting with Respect to the Powers of the East India Company
To Borrow Money under their Seal, and to Incur Debts in
the Course of their Trade, by the Purchase of Goods on
Credit, and by Freighting Ships or other Mercantile
Transactions