The letter of credit is a mode of payment, widely used in the international trade. In this case the customer’s (purchaser’s) bank is obliged to transfer amount to the customer’s account for the supply of goods or services provided, if the supplier submits the documents specified in the letter of credit and meets the requirements.
Documentary letter of credit is a monetary obligation which the bank assumes based on the customer instruction, that is to say the bank is obliged to make or ensure payment to the seller of goods after the documents set out under the terms of LC have been submitted.
The letter of credit helps to overcome a number of obstacles of international trade:
- Lack of mutual business confidence between the parties of trade transaction
- Numerous risks both for an importer (buyer) and exporter (seller)
- Lack of funds necessary to execute a transaction.