What is a Letter of Credit?

The letter of credit is a document that guarantees the buyer will make payments to the sellers. It is issued by a bank and ensures that the buyer will make payments on time and in full. If the buyer is unable to make such a payment, the bank covers the full amount or the remaining amount on behalf of the buyer. You can know about LC from import and export business trainingLearn the importance of Letter of Credit with export import training  A letter of credit minimizes risk in international trade transactions where the buyer and seller do not know each other. It is issued against a pledge of security or cash. Banks usually collect a fee, which is typically a percentage of the Letter of Credit amount. Import export training in India provides the best international knowledge to start a business.  

Features of Letter of Credit-  

  • The bank charges different fees depending on the type of Letter of Credit. 
  • International Chambers of Commerce guidelines are issued for any Letter of Credit. 
  • If the bank finds a fault in the buyer’s name, or the product name, the payment will be denied. 
  • This process involves only the exchange of documents, not the supply of goods or services.  
  • Details in the letter must be accurate, including the name of the seller, date, amount, product name and quantity, etc. 

Types of Letter of Credit- 

1 Sight Credit- Using a sight letter of credit, an entrepreneur can present a bill of exchange to the lender and take the funds immediately. A sight letter of credit is considered to be the fastest letter of credit because the funds can be accessed instantly upon presentation of a bill of exchange.  2 Time Credit- A bill of exchange that is paid after an agreed time period between a lender and borrower is called a time credit. This type of credit involves a time limit. Letter of Credit defining time credit gives the borrower few days to pay back the amount, only once the lender receives the repayment check.  3 Revocable Credit- Letters of credit with revocable terms may be amended or cancelled by the issuing bank. It is not necessary for the issuing bank to inform beneficiaries regarding any changes to the letter of credit.  

4 Irrevocable Credit-

 Irrevocable Credits are LCs in which the terms and conditions cannot be amended or revoked by the issuing bank; instead, the bank must follow the directions or commitments specified in the letter of credit.   

5 Confirmed Credit- 

Confirmed LCs are those where a bank other than the issuing bank adds its own confirmation to the credit. The beneficiary’s bank will submit the documents to the confirming banker when the LC is confirmed.  


Generally, a letter of credit supports a beneficiary or seller in exchange agreements, where the bank ensures that the buyer or the issuing bank pays the seller the agreed upon amount. In the case of a transferable letter of credit, the seller can choose another party to make the payment. Know how you can deal with such kind of terms with import and export training courses.   To know more about international trade live free webinar with Digital Exim by our expert Kavit Ashwin Shah. Click the link to attend our webinar.   https://chat.whatsapp.com/Bqz4SWH55nSGtKj3GnJAC8 Do Visit our Website!  

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