What is a letter of credit (L/C) and how can I pay for orders by way of L/C?

A letter of credit is a document issued by a bank guaranteeing that a buyer will a pay the correct amount of money to a seller of time. It can be thought of a cash advance (undertaking). When a supplier sends documents proving the goods were supplied as described in the L/C, the bank either pays the supplier.

Immediately (known as sight L/C), or an a future date after delivery documents are presented (known as usance L/C). The buyer then pays for the order on an agreed date. If the buyer fails to make the full payment, the bank is required to pay the balance.

Why pay with a letter of credit?

Lower your risk

A LC is one of the most secure methods of payment for both sides. The risk of non-payment is transferred from the seller to the bank and gives the buyer a guarantee that the seller will honor their side of the deal and provide documentary proof of this.

Why pay with a letter of credit?

Build trust with your supplier

You can significantly expand your ability to do business with companies outside your home country by strengthening your financial position with suppliers.

Why pay with a letter of credit?

Make bigger orders

A letter of credit minimizes risk, maximizes control, and optimizes profits associated with international trade by making transactions simpler, smoother, and safer for all sides.

Why pay with a letter of credit?

Manage your cashflow

Timely Payment leads to better Cash Flow Planning. LC grants the purchaser more control and more capital flexibility while giving the supplier more cash flow and some assurance of full payment.

A letter of credit is a contract among four parties: the buyer and their issuing bank, the seller and its negotiating bank. Here’s how a letter of credit works.

  • The importer arranges for the issuing bank to open an LC in favor of the exporter.
  • The issuing bank transmits the LC to the nominated bank, which forwards it to the exporter.
  • The exporter forwards the goods and documents to a freight forwarder.
  • The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank.
  • The nominated bank checks documents for compliance with the LC and collects payments from the issuing bank for the exporter.
  • The importer's account at the issuing bank is debited.
  • The issuing bank releases documents to the importer to claim the goods from the carrier and to clear them at customs.

For a letter of credit payment, the buyer will issue the letter of credit from their issuing bank to the seller’s designated bank. Machinex will help the seller to register the letter of credit information and scan a copy of swift/necessary documents. Machinex will also help with handling the documents review and presentation of such documents to the negotiating bank. Machinex, together with licensed financial institutions, could provide L/C financing to sellers. The deal information will be kept under confidential conditions.

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