Letter of Credit
Letter of credit is a broadly used banking term for making payment commitments in domestic and international trade markets. The abbreviations use for letter of credit is LC, LOC, and L/C however, it is also known as documentary credit. LC is a letter issued by a bank or financial institution on behalf of a buyer to a seller. In short, it is an assurance to sellers that they will get paid for the business activities like manufacturing, selling, or service providing.
There are different kinds of letter of credit:
Revocable: A letter of credit comes with the provision of alteration or cancelation even after issuing to the buyer.
Irrevocable: This type of letter is contrary to the revocable letter of credit as it cannot be cancelled or edited.
Transferrable: As per the request by the seller the letter of credit can be transferred or redirected.
Time Draft: This kind of letter of credit comes with the payment condition within the certain period of time.
Furthermore, the letter of credit is the most preferred option for exporters. A legal document issued by a bank as per the pre-decided terms between the exporter and importer. Therefore, the letter guarantees the payment to exporter so that the services can go uninterrupted.
Moreover, there are few benefits of export letter of credit which includes guaranteed cash flow with the extended payment terms between buyers and suppliers. The adequate information about the payment like date, currency and amount make the cash flow easier.
The letter of credit provides a safe and secured environment for the growth of business in both domestic and international markets.