What is the L C payment method? (2024)

What is the L C payment method?

Letters of Credit

A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.

In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and against specified documents. A guiding principle of an LC is that the issuing bank will make the payment based solely on the documents presented, and they are not required to physically ensure the shipping of the goods.

The system divides all knowledge into twenty-one basic classes, each identified by a single letter of the alphabet. Most of these alphabetical classes are further divided into more specific subclasses, identified by two-letter, or occasionally three-letter, combinations.

A Letter of Credit (LC) is a document that guarantees the buyer's payment to the sellers. It is issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the remaining amount on behalf of the buyer.

Risk of Default by Issuing Bank

Though an LC transfers the creditworthiness from the buyers to the issuing bank, so if the issuing bank defaults, there is a risk of payment failure to the exporters.

Letter of credit is a safe mode of payment commonly for any business especially in international business also. Letter of credit is been known to be one of the safest payment options for importers in international trade transactions.

The letter of credit involves the exporter, the importer, the issuing bank, and the advising bank (confirming bank). A letter of credit, popularly known as an LC, is a written document issued by the importer's bank.

Types of letters of credit include commercial letters of credit, standby letters of credit, and revocable letters of credit. Other types of letters of credit are irrevocable letters of credit, revolving letters of credit, and red clause letters of credit.

LC is the written document from the buyer to a foreign bank to pay the exporter a sum of money when certain conditions are met. On the other hand, TT is made when the foreign buyer is ready to pay for products received. Which is the most common payment method in international trade?

What is the advantage of using LC?

Aside from guaranteeing payment, a LC ensures payment arrives on time. This is particularly important if there is a significant time lag between the delivery of goods and payment – especially in the event of deferred payment.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.

In most cases applicants pay only letter of credit issuance charges and let the banks collect all the remaining fees from the beneficiaries. As a result confirmation fees will be paid by the beneficiaries in most cases.

On the second line of that paragraph there is a space for an “Expiration Date”. This date is usually one year after the letter of credit is issued or another date within a similar time period that coincides with the bank's internal review process.

A buyer will typically pay anywhere between 0.75% and 1.5% of the transaction's value, depending on the locations of the issuing banks.

In an LC, banks serve as a bridge between the traders to secure the transaction. However, LC transactions might put either of the companies at risk since the exporter might have to wait for 30 to 90 days to receive payments.

Accordingly, a letter of credit provides protection for both the buyer and seller: Both parties know that the issuing bank guarantees the payment component of their transaction.

Letter Of Credit (LC): LC is a non-funded credit facility, most commonly used by businesses engaged in export and import.

Who is the issuer of LC?

LC Issuer means one or more banks, trust companies or other Persons in each case expressly identified by Administrative Agent from time to time, in its sole discretion, as an LC Issuer for purposes of issuing one or more Letters of Credit hereunder.

Inspection Certificate (Proof of Quality) Insurance Certificate (Proof of Insurance) Health Certificate of Phytosanitary Certification. Consular Invoice or Legalized Commercial Document(s)

Usance LCs, also known as deferred payment LCs, provide a usance period of 30, 60, 90, or 120 days to make the payment after obtaining the paperwork. This is referred to as LC 30, LC 60, or LC 90, and the maximum usance period of a letter of credit is 120 days.

An unconfirmed LC means that only the issuing bank is responsible for payment. Generally, irrevocable and confirmed LCs are more secure and preferable for sellers, while revocable and unconfirmed LCs are more flexible and cheaper for buyers.

When you have a transferable letter of credit, you can transfer the right of payment to one or more third parties. One example of a transferable letter of credit is in the case of exporting and importing goods. Let's say your business imports expensive parts from another country in order to build its products.