How To Define Letter Of Credit?

A letter of credit is a means of making payment for the import of goods. It is issued by the buyer's bank in favor of seller. All terms and conditions are stated in it. Pritchard says," A letter of credit is commitment on the part of buyer's bank to pay or accept drafts drawn upon it provided such drafts do not exceed specified amount.

How a letter of credit is opened: following is the procedure of L.C
1. Sales contract: If the exporter of any company wants to sell any commodity to the importer of another country, who settles with the buyer about the prices, the quantity and quality of goods and moods of making payment. They will enter into an agreement.
2. Document preparation: The bank will ask the applicant to provide import license and Performance invoice. After checking the documents, the banker will ask the importer to file an application on the printed form.

3. Application form: The bank will provide a printed application form. If all the documents are found in order, the importer will submit an application form with necessary details discussed between exporter and importer, like shipment, insurance and total value of goods. The applicant will request the bank to open an L.C in favor of exporter.

4. Completion of Application form: The L.C form is filled by the banker as per information of applicant and all terms and conditions are stated in the form. The bank can open L.C because they are authorized dealers in foreign exchange.

A letter of credit would be a document from your bank or credit-union stating that you have established some kind of credit with them for XXXX amount of money.

Letters of credit are typically used in purchasing goods over-seas,auction houses and foreclosure auctions.

Sincerely,

Tony