A Letter of Credit (LC) is a mode of payment used for the importation of visible goods.
It is a written undertaking given by a Bank (issuing Bank) at the request of it’s customer (applicant), in which the Bank obligates itself to pay the exporter (seller/beneficiary) up to a stated amount within a prescribed time frame upon presentation of stipulated documents that conform to the terms and conditions of the documentary credit.
The major participants in an LC transaction are:
Common types of Letter of Credits are:
Any Letter of Credit that carries the payment obligation of at least two banks being the issuing bank and any other bank i.e the confirming bank.
The seller may either request a named bank to confirm the credit or just ask for confirmation by any reputable bank.
Confirmation comes at a cost since it is a service rendered by the confirming bank. The cost of confirmation can be borne by either the applicant or the beneficiary depending on the agreement between them and the instruction given to the opening bank.
For a Letter of Credit payable at sight, payment would be made upon presentation of credit compliant documents while for deferred payment Letter of Credit, payment is made at a later date (in accordance with the agreed date stated in the Letter of Credit e.g 60 days from bill of lading date or invoice date e.t.c).