Letter of Credit


A Letter of Credit is a document issued by a financial institution, assuring payment to a seller of goods and services provided certain documents have been presented to the bank.
These are documents that prove that the seller has performed the duties under an underlying contract (eg. sale of goods contract) and the goods/services have been supplied as agreed. In return for these documents, the beneficiary(seller) receives payment from the financial institution that issued the letter of credit.


After a contract is concluded between a buyer and a seller, the buyer's bank supplies a letter of credit to the seller.

Seller consigns the goods to a carrier in exchange for a bill of lading.

 


Seller provides bill of lading to bank in exchange for payment. Seller's bank exchanges bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for payment from the buyer.

 


Buyer provides bill of lading to carrier and takes delivery of goods.

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