LETTER OF CREDIT: Bank-issued document authorizing transfer of funds from buyer to seller under established terms and conditions in international transactions. A written commitment with regard to payment (Subject to meeting certain terms and conditions) given by the importer’s bank on behalf of the buyer to the exporting bank or Seller. Buyer’s bank is known as “Issuing bank” and the Seller’s bank is known as “advising bank”, where seller is also termed as “beneficiary” as per LC terms.
Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody is on the same page.
A letter of credit (LC), also known as a documentary credit, bankers commercial credit, is a payment mechanism used in international trade to perform the same economic function as a guarantee, by allocating risk undertaken by contracting parties. At law, a letter of credit is categorised within Financial law as a form of a Simple position, which alongside guarantees, derivatives, and insuranceallocate risk as a form of a promise from one party to another