It is an instrument issued by a bank at the request of a buyer of merchandise, whereby the bank itself gives a guarantee to make payment to the seller. A bank or a financial institution acts as a third-party between the buyer and the seller and assures the payment of funds on the completion of certain obligations. It is 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. In foreign trade, it is opened by an importer through his banker in favor of an exporter. This benefit is especially valuable when a client is located in a potentially unstable economic environment. It is an important financial tool in trade transactions.
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A letter of credit LOC is a promise from a bank to make a payment after verifying that somebody meets certain conditions. The easiest way to understand how LOCs work is to see an example, and this tutorial describes the process step-by-step. You can also just read an overview if you prefer a text-only explanation without the visuals. For this example, we assume that an importer is buying goods from an exporter.
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.