What are Letters of Credit?
A letter of credit is a payment guarantee given by a bank - (the issuing bank)
on behalf of a buyer - (the applicant) to pay a seller - (the beneficiary)
an explicit amount of money on presentation of specified documents representing
the supply of goods as defined and within the specific time limit stated on the Letter of Credit.
The issuing banks role is two-fold;
The first role is to guarantee to the seller that the bank will pay the seller the amount due if all Compliant Documents* are presented. This offers security to the seller -
*(the exact documents specified by the Letter of Credit)
The bank is saying to your supplier... "We guarantee that you will be paid if you present documents (XYZ)"
Secondly is protecting the buyer's interests by examining the documents, and only paying if these documents comply with the terms and conditions set out in the Letter of Credit.
Where the bank says... "We will pay your supplier on your behalf only if they present documents (XYZ)"
Note that the Letter of Credit refers to documents representing the goods - Not the goods themselves. Banks are not in the business of examining goods on behalf of their customers.
Typically the documents requested will include
* Commercial Invoice
* Transport Document such as a Bill of Lading or Airway Bill,
* Insurance Document
* Inspection Certificate
See if you qualify...
