What is the Full Form of LC

LC: Letter of Credit

LC Stands for a Letter of Credit. In international transactions, a letter of credit is typically used when the issuing bank, or the buyer's bank, ensures that the buyer will pay the seller the exact amount. The bank must settle any unpaid debts on the buyer's behalf if the buyer neglects to make the required payment to the seller.

Features of LC

The following are the characteristics of the letter of credit:

1. Revocability: The letter of credit might be revocable or not. Most often, irrevocable LCs are used since they cannot change without the approval of all parties. However, if a bank provides a revocable LC, that bank can cancel that LC at any time.
2. Negotiability: The LC is seen as easily negotiable and may be used as money since it can transfer swiftly from one side to another. However, LC is negotiable if provided as an unqualified guarantee to pay the sum on demand at a specific period.

Types of LC

The following list includes the various letter of credit types:

1. Irrevocable LC: Without the beneficiary's previous consent, this type of LC cannot be changed or canceled.
2. Revocable LC: The issuing bank may change or revoke this form of LC without the beneficiary's consent.
3. Transferable LC: The vendor may transfer this type of LC to third parties and utilize it like cash.

What is the Process?

To obtain the letter of credit, the buyer must visit the bank in his home country and submit various pieces of information, including the payment amount, the date and mode of shipping the goods, their arrival time and location, the seller's information, etc.

The bank will issue the LC a promise to deliver the money to the seller, after receiving the details and if satisfied. The bank will then send the money to the seller's bank, which is often situated in the seller's home country.

The seller's bank will validate the LC and send it to the seller after receiving it. The seller must then confirm that the buyer and seller have accepted all of the terms and conditions specified in the LC. The vendor must now fulfill all LC standards to order to be paid via LC.

The seller will get the payment within the time-frame indicated in the LC, provided that all requirements are satisfied and the supplied items are by the contract.

An LC Example:

Mr. Charles, owner of the clothing firm Textile Incorporation in the United States, got a $20,000 order for clothing from Clothing Incorporation in London. Mr. Charles wanted a letter of credit because he had no experience with the clothes company.

As a result, the buyer requested that the local bank issue the LC to the seller's bank. The LC is a document that serves as a guarantee from the buyer's bank, stating that if the buyer fails to make any payments due, the issuing bank will do so on the buyer's behalf.

Elements:

The following list describes the components of a letter of credit:

1. Applicant: In every commercial transaction, the applicant is the party that pays for the goods or receives the services.
2. Beneficiary: The beneficiary is the individual who sells goods and services and receives the money in a business transaction.
   The beneficiary will give all the necessary paperwork for processing the letter of credit.
3. Issuing Bank: The bank granting the letter of credit once the parties provide sufficient supporting paperwork is referred to as the issuing bank.
   The issuing bank must make the payment on the applicant's behalf if the applicant needs to remember to give the money to the recipient.
4. Advising Bank: The bank that advises the recipient on how to use and benefit from the letter of credit is known as the advising bank. The bank must deliver the necessary paperwork to the issuing bank, but it is under no duty to pay the debt if the issuing bank doesn't pay off its commitments.
5. Confirming Bank: The confirming bank must confirm the Letter of Credit and has comparable duties to the issuing bank. Before validating the LC, it also assesses the nation and the bank that issued the LC.

Importance of LC

• LC makes it easier to do trustworthy business worldwide by lowering the risk of bad debts.
• Getting pre-shipment financing from banks and financial organizations can be eased via LC.

LC Advantages and Disadvantages:

Advantages of LC:

• The seller will likely get the money when the LC is issued. Lowering the seller's risk in the process.
• Following the banking standards that apply to issuing LC will simplify resolving any disagreement or problem.

Disadvantages of LC:

• A letter of credit is more expensive to take out. Due to the numerous formalities, it takes additional time.
• LC ignores currency fluctuations since it does not consider the change in exchange rates between the date of the contract/sale and the date of payment.

The Conclusion:

Therefore, a Letter of Credit (LC) is necessary for successful international operations. Before entering any agreements, one should completely comprehend the rules and procedures.

A Letter of Credit lowers the chance of dues not being paid, enhancing commercial transactions worldwide. Therefore, the seller typically requests a Letter of Credit while exporting their goods.