Letter of credit is an instrument or a letter of comfort issued by the Buyer’s bank on behalf of buyer for the benefit of the seller. This letter guarantees the payment to the seller so that the seller can manufacture and supply the goods or provide the services to the buyer without any inhibitions. The seller has to ensure that the all the terms and conditions of the Letter of Credit (LC) is strictly followed. The seller presents the Letter of Credit and raises money from his bank to meet the working capital requirements viz. purchase of raw materials, payment of wages, manufacturing expenses etc. After manufacture, the goods (as per specifications mentioned in the Letter of credit) are shipped to the destination as required by the buyer. The shipping documents along with all the other documents are presented by the seller to his banker and the amount of pre shipment loan/facility is settled and the balance is realized by the seller.
This instrument or method is often used in Selling, Buying or Service Providing contracts across countries and / or where both the parties have no established business relationships.
NOTE :- The above criteria are generally applicable for all the banks, however some of the above criteria may vary from bank to bank(lender).
