Letter of Credit

What is LC
• A letter of credit (LC) is a financial instrument
that a bank issues on behalf of a buyer, typically
it is a guarantee of payment to a seller for
goods or services. It is a promise from a bank to
pay the seller if the buyer is unable to fulfill their
financial obligations.
 Steps in LC are described
below

• 1}The buyer and seller agree on the terms

of the sale, including the price, delivery
date, and any other conditions.
• 2}The buyer requests that their bank issue
a letter of credit in favor of the seller. This
typically involves the buyer providing the
bank with information about the
transaction
• 3}The issuing bank, upon reviewing and
approving the request, sends the letter of
credit to the seller's bank,or confirming
bank, or directly to the seller.
• 4}The seller, upon receipt of the letter of
credit, ships the goods or provides the
services to the buyer.
• 5}The seller presents the required
shipping documents, such as a bill of
lading or invoice, to the advising bank as a
proof that the goods have been shipped or
service has been provided.
• 6}The advising bank examines the
documents and, if they are in compliance
with the terms of the letter of credit,
releases the payment to the seller.
• 7}The buyer, upon receipt of the goods or
services, pays the issuing bank for the
letter of credit.
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