LETTERS OF CREDIT Meaning and
Definition
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Letters of credit are financial instruments commonly used in international trade to provide a guarantee of payment between parties involved in a transaction. A letter of credit is a document issued by a bank or financial institution on behalf of a buyer (known as the applicant) that guarantees payment to the seller (known as the beneficiary) upon the fulfillment of certain conditions. These conditions typically involve the submission of specific documents proving that the goods or services have been delivered as agreed upon.
Letters of credit serve as a form of risk mitigation for both the buyer and seller. From the buyer's perspective, it provides assurance that payment will only be made if the goods or services are delivered as specified in the contract. For the seller, it offers a guarantee of payment even if the buyer fails to fulfill their payment obligations.
The process begins when the buyer and seller agree to use a letter of credit as the payment method for a particular transaction. The buyer then applies to their bank or financial institution to issue the letter of credit, including the necessary details and conditions. Once issued, the letter of credit is forwarded to the seller’s bank, who notifies the seller. The seller can then proceed with shipping the goods or providing the agreed-upon services.
Overall, letters of credit provide a secure and reliable method of facilitating international trade, giving confidence to both parties involved that payment will be made once the terms and conditions of the transaction have been met.
Common Misspellings for LETTERS OF CREDIT
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