A letter of credit (letter of credit, L/C) is a commonly used instrument in foreign trade to secure payment for the delivery of goods and is valid as an obligation between both parties.
Brief description
The letter of credit is opened by the importer at his lending institution. The importer pays a certain amount to his bank, and then tells the financial institution what documents the exporter must submit so they can transfer the money. The importer's credit institution transmits the terms of the letter of credit to the exporter's bank. Once the terms of the letter of credit are met, the amount is paid to the exporter and the importer receives his goods.
If the seller (beneficiary) submits the letter of credit documents to its bank within a certain time, the bank designated by the buyer pays the contractually specified amount in the specified currency to the seller's bank. The purpose of this payment option is to provide security for critical transactions or high commodity values. Trading using a letter of credit is currently used most often in overseas transactions, as well as for transactions with eastern and southeastern European countries. In the rest of Europe, the letter of credit has lost its importance.
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