Letter of Credit - L/C

12/11/10

   There are many method to pay for goods. Letter of credit is a popular one for merchant.

    Due to  the distance between a seller and a buyer, the letter of credit is necessary to guarantee and minimise risks.  The letter of credit is the most prevalent method of payment in the international sale transactions. Bank will relate to both a seller and a buyer, so  they can be more confident of the payment. [1] Moreover, the letter of credit is divided into 2 categories: the commercial letter of credit and the standby letter of credit. The commercial letter of credit is the first payment for a regular business's obligation, but the standby letter of credit is the second payment used to provide security to the seller if the buyer can perform his duty.[2]


The strategy of a letter of credit [3]

1. Both parties decide to use this form.
2. The buyer opens the credit at his bank, the issuing bank.
3. The issuing bank makes agreement between its branch or another bank in the seller's country, called the correspondent bank.
4. The relevant bank in the seller's nation informs him that the letter of credit has been applied.
5. The seller transports the goods, then get the documents and show them at the relevant bank in his country.
6. The correspondent bank checks them, then pay the seller. The payment can be delayed, it depends on the letter of credit.
7. The correspondent bank gives the document back to the issuing bank and the issuing bank repays the money to the correspondent bank.


More information : Understanding and Using letters of credit, part 1 

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[1] M Sanson, International Trade Law ( Cavendish, London 2002) 105
[2] CREDIT RESEARCH FOUNDATION,'Understanding and Using of Credit, Part I'[1999]
< http://www.crfonline.org/orc/cro/cro-9-1.html >
accessed 11 November 2010
[3] Sanson (n 1) 106