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Accountancy is involves numerous transactions and one among the most foremost for businesses is a letter of credit (L/C, LC or LOC).
LCs are issued by banks to sellers (and sometimes buyers) on behalf of buyers as a promise of payment of a fixed sum of money at a particular date against specific terms and conditions. When the bank issues an LC, it is assured that the buyer will pay. It could be in terms of collaterals from the buyer like depositing sufficient money or using a credit line from the bank (a loan). It also asks for appropriate documents in accordance with uniform customs and practices for documentary credit publication.
An LC is generally used in both domestic and international trade. It provides a sense of security to the parties involved with certainty of payment when LC terms are fulfilled.
There are different types of LCs: documentary, merchandise, commercial, trade, standby, revocable, irrevocable, unconfirmed, confirmed, sight, time/usance, and transferable credit.
Most people use the commercial/documentary LC for payment of goods shipped or services performed. A standby LC can function like a guarantee solely on performance of service or financial obligation default. A confirmed LC assures the seller guarantee of payment from another trustworthy bank. Sight and time/usance are LCs that have the procedure of paying through drafts. Transferable credit is employed when the original beneficiary transfers the LC to any other party/ies like a supplier.
• A letter of credit is a useful tool for businesses
• It takes many forms depending on the transaction
• Banks play an important role in the issuance of LCs
Source: Arva Shikari, Special to Classifieds
The writer is a freelancer