What Is An LC, The Various Types, and How It Works?

What Is An LC - The Various Types and How It Works

In simple terms, a Letter of Credit is an official paper sent to the advisory bank, usually done on behalf of the applicant, who is the importer. This procedure ensures the exporter of receiving their payment upon completion. This letter eradicates issues such as a complete denial of repayment. The LC states how much has to be paid and when it has to be paid. As long as everything is in compliance with the T&C’s mentioned, there is no reason as to why the bank should refuse the payment. Now let’s move on to discuss the various types including the trade finance letter of credit among others.

Different Varieties

Now that we’ve defined what an LC is, let’s move on to comprehend the various types available.

– Confirmed LC
– LC at sight
– Transferable LC
– Usance LC
– Revocable LC
– Irrevocable LC
– Freely negotiable LC
– Back to back LC
– Revolving LC
– Standby LC

Trade Finance Letter of Credit

 

How Does It Work?

Submit the Document

As mentioned earlier, it is basically an arrangement between the issuing bank and the applicant, where the bank operates based on the guidance provided by the importer. Under this scheme, they are asked to make a payment to the beneficiary. On the other hand, they could also accept the bills produced by the exporter, or authorize the advisory bank to pay the bills.

Verification
Upon receiving the receipt from the importer, the exporter should then verify it and begin with the shipping procedure.

Present The Documents

Once the delivery part is complete, the exporter will have to present the advisory bank with the documents.

Verify and Complete The Payment

Lastly, the bank then has it sent to the issuing bank, where the amount is either paid, negotiated, or accepted, depending on the case. The issuing bank verifies all the documents and acquires the payment from the importer. Finally, the documents are sent to the importer, who makes use of it to get possession of their shipped goods.

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