Letter of Credit (LC)

Letter of credit (LC) – what is it?

A Letter of Credit (LC) is a commitment by a bank to make a payment to a beneficiary (seller) upon fulfillment of certain conditions, which ensures the security of international transactions. It is a financial instrument commonly used in international trade that minimizes risk for both parties – buyer and seller.

Key Aspects of Letters of Credit:

1. transaction security

A letter of credit acts as a security for the seller, as the bank agrees to pay the money once the goods are delivered and certain documentary conditions are met. This ensures that the seller will receive payment as long as it provides the required documents, such as invoices, waybills or quality certificates.

2 Types of letters of credit

There are different types of letters of credit, including revocable letters of credit (amendable by the buyer) and irrevocable letters of credit (where amendment requires the consent of all parties). Letters of credit can also be confirmed by another bank, which further increases the security of the transaction.

3 Process

The process of using a letter of credit usually involves several steps:

The buyer applies to his bank to open a letter of credit in favor of the seller.
The bank opening the letter of credit informs the seller’s bank.
The seller delivers the goods and the required documents to its bank.
The seller’s bank verifies the documents and forwards them to the buyer’s bank.
Once the documents are approved, the buyer’s bank makes payment.

4 Application

Letters of credit are particularly useful in international transactions, where differences in regulations, language and culture can introduce additional risks. The use of letters of credit mitigates these risks and allows both parties to be more confident in the performance of the contract.