A letter of credit is basically a letter from the bank officials which guarantees that a buyer’s payment to the seller will be received on time and for the right amount. In case the buyer is not able to make payment for the purchase, the bank has to cover the full or the remaining amount of the purchase the buyer has made.
How does the Letter of Credit work?
Since the letter of credit is a negotiable tool, the bank issuing it will pay the beneficiary or any other bank which is nominated by the beneficiary. If the letter of credit has to be transferred, the beneficiary can assign another entity like corporate or a third party, the right to draw. Hence, letter of credit makes it possible to do business to any corner of the world.
The issuing bank, and the beneficiary. There are various types of letter of credit. Click here to read
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