Letter of Credit (L/C)

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Definition: Letter of Credit (L/C)

A letter of credit is a legal document which is issued by the buyer’s bank which allows payment to be made with the presentation of stipulated documentation. This letter is a guarantee from the buyer’s bank that payment will be made upon receipt of proof that terms and conditions of trade have been met.

The parties to a Letter of Credit are :

(1) Buyer

(2) Buyer's bank 

(3) Beneficiary

(4) Beneficiary's bank 

(5) Confirming BANK 

Before the Letter of Credit funds are released, it is the responsibility of the issuing bank to ensure, on behalf of its client (the Buyer), that all the mandatory documentary conditions have been met.

There are many different types of letters of credit:

1 Irrevocable Confirmed Letter Of Credit 

2 Revolving Letter Of Credit 

3 Standby Letter Of Credit 

4 Transferable Letter Of Credit 

5 Back to Back Letter of Credit 

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