Letter of Credit

Letter of Credit – The letter of credit, as the name suggests is a letter that the buyer’s banker that is sent to the seller’s banker authorizing payment of a certain amount of money. This letter of credit is majorly used in foreign trade that involves large amount of transactions.

Transactions when done internationally involve complicated procedures that makes letter of credit important and helpful tools that enable smooth operation. Since national or international trade transactions have numerous factors to impede the process like long distances, difficulty in knowing both parties personally and legislation makes letter of credit an absolute necessity. These kinds of letter of credits are permanent and irrevocable and cannot be cancelled by any means unless the issuing bank, beneficiary or confirming bank have given their consent. Transactions aided by letter of credit also involves slight risks involving legal and fraud departments.

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Such risks may include delivery of inferior quality products, late delivery or even cancellation of the order entirely. It is important to review all documents and paperwork on time to prevent any anomaly.

Edited and Updated 08th March 2014

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