Letter of Credit (L/C)
A conditional bank guarantee.
Ls/Cs are financial documents issued by banks, at the request of a consignee, guaranteeing payment to the shipper of the cargo provided that certain terms and conditions are fulfilled. Normally a L/C contains a brief description of the goods, the documents required, a shipping date, and an expiration date after which payment will no longer be made.
An Irrevocable Letter of Credit is one which obligates the issuing bank to pay the exporter when all terms and conditions of the L/C have been met. None of the terms and conditions may be changed without the consent of all the parties to the L/C.
A Revocable Letter of Credit is subject to possible recall or amendment at the option of the applicant, without the approval of the beneficiary.
A Confirmed Letter of Credit is issued by a foreign bank with its validity confirmed by a US bank. An exporter who requires a confirmed L/C from the buyer is assured payment from the US bank in case the foreign buyer or bank defaults.
A Documentary Letter of Credit is one for which the issuing bank stipulates that certain documents must accompany a draft. The documents assure the applicant (importer) that the merchandise has been shipped and that title to the goods has been transferred to the importer.