Letter of credit (L/C),
Definition of Letter of credit (L/C):
A letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions.
A written commitment to pay, by a buyers or importers bank (called the issuing bank) to the sellers or exporters bank (called the accepting bank, negotiating bank, or paying bank).
A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. These documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank, or negotiates credit. Letters of credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers. However, the banking system does not take on any responsibility for the quality of goods, genuineness of documents, or any other provision in the contract of sale. Since the unambiguity of the terminology used in writing a letter of credit is of vital importance, the International Chamber Of Commerce (ICC) has suggested specific terms (called Incoterms) that are now almost universally accepted and used. Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant. Although letters of credit come in numerous types, the two most basic ones are (1) Revocable-credit letter of credit and (2) Irrevocable-credit letter of credit, which comes in two versions (a) Confirmed irrevocable letter of credit and (b) Not-confirmed irrevocable letter of credit.
How to use Letter of credit (L/C) in a sentence?
- Whenever I went to buy new equipment for the company I was given a letter of credit instead of cash.
- The letter of credit was required to complete the deal so once it was received then the project could begin.
- By way of illustration, take a case in which the customer requests the bank, or other institution, to issue a letter of credit or guarantee to back his purchase of goods.
- I got the letter of credit and was happy because I knew the letter meant that they were going to pay.
Meaning of Letter of credit (L/C) & Letter of credit (L/C) Definition