Understanding a letter of credit
A documentary Letter of Credit (LC) is a financial instrument issued by banks as a contract between an importer (or buyer) and an exporter (or seller). This contract specifies the terms and conditions of the transaction, under which the importer promises to pay the exporter in exchange for the goods or services provided by the exporter. An LC transaction typically involves multiple parties. A simplified summary of the parties involved is described as follows:
- Importer: The buyer of the goods or services.
- Exporter: The seller of the goods or services.
- Freight forwarder: The agency that handles the shipment of goods on behalf of the exporter. This is only applicable in cases where there is an exchange of physical goods.
- Issuing bank: The bank that the importer requests to issue the LC application. Usually, the importer has a preexisting relationship with this bank.
- Advising bank: The bank that informs the exporter about the issuance...
