The Letter of Credit – what this is and how it works.
An LC serves as a bank guarantee or financial security required for a transaction to take place between a buyer and seller of goods across borders.
A letter of credit (LC) or letter of undertaking is a payment mechanism mostly for international trade, where a letter issued by a bank to another bank (especially one in a different country) serves as a guarantee for payments made to a specified person under specified conditions.
When we issue letters of credit, they’re Westpac or an Australian big four bank’s letter of credit. All we’re doing is putting up the collateral to finance that letter of credit. We get our money instead of the client, because our client may not have the cash or the security. We go to the bank on their behalf and we give the bank the cash to secure it. So the money leaves our account, goes to Westpac’s account, and we have no further access to it, and it secures that letter of credit. Now when that supplier overseas satisfies that letter of credit, they go to their bank, they cash it, and our bank releases the money to their bank and their bank then pays the supplier.
It provides security for us and the buyer to make sure that those goods do get shipped.
The manufacturer oversees will be guaranteed that they will get paid by their bank once they ship the goods or fill the conditions listed on the letter of credit.
What are the requirements?
- Commercial Invoice
- Shipping/Transport Documents
- Insurance Certificate
- Inspection Certificate
- Financial Documents
As you can see from above, the letter of credit is an essential tool for international trade. Performance and protection from both sides can be moderated by the use of payment guarantees.
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