What is a Letter of Credit?
By reading this presentation, you will gather some basic yet very important information regarding the letters of credit.
Understanding the Letter of Credit
Letter of credit is a payment method in international trade.
Other payment methods in international trade are Cash in Advance, Documentary Collections, Open Account and Bank Payment Obligation.
Synonyms of the Letter of Credit
Common definitions used to identify the letter of credit term with the same meaning are:
- Documentary Credit
- Documentary Letter of Credit
- Documentary Commercial Letter of Credit
- Credit
- Commercial Letter of Credit
- Standby Letter of Credit
Letter of Credit Definition
UCP 600 defines letter of credit as:
“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.”
Letter of Credit Rules
- ICC, International Chamber of Commerce, publishes the letter of credit rules.
- Letter of credit rules are called UCP, Uniform Customs and Practice for Documentary Credits.
- Letter of credit rules are regularly updated by ICC.
- Latest set of letter of credit rules is called UCP 600.
Parties in a Letter of Credit Transaction
Main parties involved in a letter of credit transaction are indicated below;
- Issuing Bank
- Beneficiary
- Applicant
- Advising Bank
- Nominated Bank
- Confirming Bank
- Reimbursing Bank
