Mastering Letters of Credit

3 Questions

What is a letter of credit?

A document issued by a bank that guarantees the payment of a customer's drafts up to a stated amount for a specified period

What is the purpose of a letter of credit?

To substitute the bank's credit for the buyer's and eliminate the seller's risk

What are the requirements for a letter of credit to be usable?

It must be irrevocable, dated, specify the beneficiary and the account party, specify the amount, be numbered, issued on bank stationery, signed, allow drafts at specific tenors to be drawn on the bank, and list the documents required

Study Notes

Letter of Credit

A letter of credit is a financial instrument issued by a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
It is a written commitment by a bank to pay a certain amount of money to a beneficiary (seller) if certain conditions are met.

Purpose of a Letter of Credit

The primary purpose of a letter of credit is to provide assurance to the seller that they will receive payment for the goods or services provided.
It serves as a guarantee that the buyer will fulfill their payment obligations.

Requirements for a Letter of Credit

The letter of credit must be issued by a reputable and creditworthy bank.
The letter of credit must clearly state the terms and conditions of the payment, including the amount, payment method, and due date.
The letter of credit must be presented by the seller to the bank to obtain payment.
The seller must provide the necessary documentation, such as commercial invoices, bill of lading, and other required documents, to the bank to comply with the terms of the letter of credit.