What is a Letter of Credit? II LC II An International Payment Method

What is a Letter of Credit? II LC II An International Payment Method

LC is a short term of Letter of credit. It is also known as a documentary credit, bankers’ commercial credit, letter of undertaking etc. Whatever the name we called. LC is one of the international payment methods.

If we would like to make any international business transaction, we need an acceptable international payment method. LC or letter of credit is one of them out of well recognized 5 international payment methods.

If we would like to buy or sell something to or from the rest of the world, we use LC or Letter of Credit.

What is LC?
LC is an undertaking issued by a buyer’s bank using Message Type FIN 700 SWIFT message on behalf of the buyers or its own account to pay the value of presented original documents to the seller’s Bank complying with the prescribed laws & agreed terms.

We get two technical words from the definition such as FIN 700 & Swift.
Firstly we have to know about SWIFT. SWIFT stands for The Society for Worldwide Interbank Financial Telecommunication. It is a secure network system used by banks to transfer financial information from one bank to another.

Secondly, FIN 700. Here we see two different codes, one is FIN and another is 700. When a bank sends any financial message, they use three alphabets FIN before the numerical code consists of three digits to convey the message to the receiver bank that what types of financial information they have sent using SWIFT. For different financial messages, bank uses different numerical codes. When a bank gets a message with numerical code 700, the receiver bank understands that it is a message for LC or Letter of credit.

We know that Importing and exporting involves risks. Exporters run the risk of buyers failing to pay for goods, while importers may risk paying but never receiving goods. Because of the distances involved, it may be difficult to resolve any disputes.

If we analyze the definition of LC, we can say that both parties of LC are risk free. A buyer or importer gets specific goods & a seller or exporter gets payment accordingly. Both are done in accordance with LC terms & following some international laws provided by International chamber of commerce. So, both parties are safe in this way. An exporter is safe for getting payment & An importer is safe for getting goods.


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