In order to be negotiable, a letter of credit should include an unconditional promise of payment upon demand or at a particular point in time. The main characteristics of letters of credit are as follows: NegotiabilityĪ letter of credit is a transactional deal, under which the terms can be modified/changed at the parties assent. These principles remain the same for all kinds of letters of credit. If the documents presented are in accord with the terms and conditions of the LC, the bank has no reason to deny the payment.Ī letter of credit is beneficial for both the parties as it assures the seller that he will receive his funds upon fulfillment of terms of the trade agreement and the buyer can portray his creditworthiness and negotiate longer payment terms, by having a bank back the trade transaction.įeatures / Characteristics of letter of creditĪ letter of credit is identified by certain principles. In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and against specified documents.Ī 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 importer is the applicant of the LC, while the exporter is the beneficiary. Through its issuance, the exporter is assured that the issuing bank will make a payment to the exporter for the international trade conducted between both the parties. Letters of credit were introduced to address this by adding a third party like a financial institution into the transaction to mitigate credit risks for exporters.Ī letter of credit or LC is a written document issued by the importer’s bank (opening bank) on importer’s behalf. The sheer distances involved in international trade, different laws and regulations, and changing political landscape are just some of the reasons for sellers needing a guarantee of payment when they deliver goods through the maritime route to their sellers. Some of these uncertainties revolve around delayed payments, slow deliveries, and financing-related issues, among others.
There are several uncertainties that arise when buyers and sellers across the globe engage in maritime trade operations.
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