Procurement Glossary & Terminologies

Glossary / Letter L / Letter of credit

Letter of credit

What is Letter of credit ?

A letter of credit is an assurance from a bank that a buyer will make the proper payment to a seller on time and in full. The bank will be obligated to pay the transaction’s whole or remaining balance if the buyer cannot make a payment on it.

The use of letters of credit has grown to be a crucial component of international trade because of the nature of these transactions, which includes issues like distance, different legal systems in each nation, and the challenge of getting to know each partner personally.

Types of Letters of Credit

Mentioned below are some of the different kinds of letters of credit:

  1. Commercial Letters of Credit

This is a direct payment mechanism where the beneficiary gets paid by the issuing bank. In comparison, a standby letter of credit is a fallback payment strategy in which the bank only pays the recipient when the holder cannot.

  1. Revolving Letter of Credit

Under the terms of this type of letter, the client may participate in an unlimited number of drawings within a given time frame.

  1. Letter of Credit for Travel

This letter assures travelers that issuing banks would accept draughts made at specific foreign banks.

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