LC stands for Letter of Credit in banking. It is a financial document issued by a bank that guarantees the buyer’s payment to a seller, provided that the seller meets all the terms and conditions mentioned in the LC. A Letter of Credit is widely used in international trade to ensure trust and smooth transactions between parties from different countries.
What Is a Letter of Credit?
A Letter of Credit is a commitment from the buyer’s bank assuring the seller that payment will be made on time and for the correct amount. This reduces the financial risk for exporters, especially when dealing with new buyers or foreign markets.
In simple words, the bank acts as a middleman, ensuring that both the buyer and the seller fulfill their obligations. Once the seller submits the required shipping and transaction documents, the bank releases the payment.
Types of Letters of Credit
1. Sight LC: Payment is made immediately after the seller submits all required documents.
2. Usance LC: Payment is made after a specific credit period, such as 30, 60, or 90 days.
3. Revocable and Irrevocable LC: Irrevocable LC cannot be changed without the consent of all parties, while revocable LC allows changes without notice. Today, most LCs are irrevocable to ensure maximum security.
4. Standby Letter of Credit (SBLC): Works as a guarantee that the bank will pay if the buyer fails to make the payment.
Why Is an LC Important in Banking?
A Letter of Credit builds trust between global buyers and sellers. It protects the seller from non-payment and assures the buyer that payment will only be made when the goods are shipped as agreed. LCs play an essential role in boosting international trade by reducing financial risk.
Benefits of a Letter of Credit
- Ensures safe and secure payments
- Helps businesses trade confidently across borders
- Reduces the risk of fraud and disputes
- Provides financial support to exporters
- Builds credibility between trading partners
A Letter of Credit (LC) is one of the strongest financial instruments in banking, especially in global trade. It protects both buyers and sellers, making commercial transactions smooth, secure, and reliable.