Letter of Credit: What is a Letter of Credit?
Posted by Michelle Grenier on Mon, May 10, 2010 @ 08:36 AM
Letters of Credit are utilized in international transactions to reduce exposure to risk.
Sellers can reduce the risk of not getting paid with letters of credit. The buyer can also reduce risk of defective performance or non-performance, with proper use of letters of credit.
What is the typical structure of the Letter of Credit transaction?
In a sale of goods, most often, the Letter of Credit transaction is made up of three contracts, as follows:
(1) Buyer-Seller Contract. The buyer and seller contract for the purchase and sale of the goods requiring payment through a documentary credit.
(2) Buyer-Bank Contract. The buyer applies for a letter of credit, instructing the buyer's bank to open the credit for the benefit of the seller based upon the application terms.
(3) Advising Bank-Seller. The issuing bank (buyer's bank) issues the letter of credit and forwards it to an advising bank within the country of the seller. The advising bank, advises the seller of the opening of the credit in seller's favor.
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(Misspellings: Leter of Credit)
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