In-depth analysis of the definition of LC letter of credit, the characteristics of the eight major types and practical applications. From the basics to advanced operations, it helps importers and exporters master key knowledge of letters of credit and reduce trade risks. Contains professional advice and practical tips!
Letter of Credit (LC) isa written payment commitment document issued by the bank to the beneficiary at the request of the applicant. This commitment letter guarantees that the bank will pay a specified amount in accordance with the terms of the letter of credit as long as the beneficiary submits documents that meet the requirements of the letter of credit within the specified period. In international trade, letters of credit play an extremely important role. It is not only a guarantee of payment, but also an important bridge for establishing trust between buyers and sellers. By using banks as intermediaries, the collection and payment risks in international trade are greatly reduced.
- Issuing applicant (importer)
- Issuing bank
- Beneficiary (exporter)
- Notifying bank
- confirming bank (if any)
This type of letter of credit is a type of letter of credit that pays immediately after the documents are verified and verified. It is most suitable for spot and short-term trade. It has the advantages of rapid collection and high capital turnover efficiency, but it requires higher funds from the buyer.
Provides payment terms ranging from 30 to 180 days, allowing buyers to defer payment. It is especially suitable for long-term partners and allows companies to use funds more flexibly.
The method of opening a new letter of credit using the original letter of credit as a guarantee is mainly used in re-export trade, which can effectively reduce financial pressure, but the operation is more complicated and requires special attention to timeliness.
It allows part or all of the letter of credit to be transferred to the second beneficiary, which is suitable for intermediary transactions and can improve the efficiency of capital use, but it can only be transferred once.
It is reusable and suitable for regular repeated transactions. It can effectively simplify procedures, but the credit limit needs to be carefully controlled to reduce risks.
Essentially, it is a performance guarantee, which is only activated when the main contract defaults. It is often used in engineering projects and service contracts, and can effectively reduce the risk of default.
Double payment protection is provided by adding the payment guarantee of the confirming bank, which is especially suitable for transactions in high-risk countries, but the cost is relatively high.
It cannot be changed or revoked without the consent of all parties. It is suitable for general trade transactions and has high stability, but the modification of terms is more complicated.
1. Confirm the terms of the trade contract
2. Prepare company qualification documents
3. Evaluate the credit limit
4. Prepare the documents required for bill transfer
• Application for letter of credit
• Trade contract
• Import license (if required)
• Corporate qualification certificate
• Review the applicant's credit
• Assess the authenticity of the transaction
• Verify the integrity of the document
• Confirm the compliance of the terms
• Bank issues letter of credit
• Notifies beneficiary
• Confirms terms of letter of credit
• Prepare shipping documents
• Submit for review
• Complete payment process
Letter of credit (LC) is an indispensable and important payment instrument in international trade. Different types of letters of credit have their own characteristics. Choosing the appropriate letter of credit type can not only improve trade efficiency, but also effectively manage risks and provide strong support for the company's international business development. Want to know more freight information? Continue reading Fuuffy News and Blog now for more articles!
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