Lesson check0 / 2 answered · 0 correct
Check 1
What problem does an LC mainly help manage?
Check 2
Does the bank normally inspect the physical goods?
What is a Letter of Credit?
Understand the basic purpose before learning any bank language.
The simple idea
A Letter of Credit, or LC, is a bank-based payment arrangement used in trade.
The buyer wants comfort before paying. The seller wants comfort before shipping. The LC gives both sides a set of payment rules.
The bank does not inspect the goods. It looks at the documents required by the LC.
A simple story
A buyer in Country A orders goods from a seller in Country B.
The buyer asks its bank to issue an LC in favour of the seller.
The seller ships the goods and presents the required documents.
If the presentation complies with the LC terms and the applicable rules, the bank follows the payment undertaking stated in the credit.
Do not confuse these
An LC is not the same thing as a loan.
An LC is not proof that the goods are good.
An LC is not automatic cash just because a SWIFT message exists.
Remember thisBanks deal with documents, not the physical goods.
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