Letter of Credit | Meaning & Process explained in International Trade

Summary

The video highlights the importance of trust in international trade and explains how a letter of credit (LC) facilitates this trust. An LC, issued by a bank on the buyer's behalf, ensures the seller receives payment upon fulfilling the transaction. If the buyer can't pay, the issuing bank covers the payment. The video uses an example of an Indian exporter and a US importer to illustrate the process. Viewers are encouraged to read an article for more details and subscribe for updates on international trade.

Takeaways

• 📜 Trust between the buyer and seller is vital in international trade.
• 📄 A letter of credit (LC) is an important document in international trade.
• 🏦 An LC is issued by a bank on the buyer's behalf and guarantees that the seller will receive payment.
• 💰 If the buyer is unable to pay, the issuing bank is liable to pay the seller.
• 🔒 The seller is ensured that he will receive funds, while the buyer can demonstrate his creditworthiness.
• 🕰️ An LC allows the buyer to negotiate longer payment terms.
• 🌾 Example: Mr. A, an Indian exporter, enters into a contract with Mr. B, a U.S. importer, for the sale of rice.
• 💳 To assure timely payment, Mr. B goes to his bank to open an LC.
• 🏦 The issuing bank sends the LC to Mr. A's bank, also known as the advising bank.
• 📦 After shipping the goods, Mr. A sends the shipment documents to the advising bank, which then sends them to the issuing bank.
• 🔍 The issuing bank verifies the documents and sends them to Mr. B.
• 💵 Mr. B makes the payment to Mr. A against the shipment of goods as per their agreement.
• ⏳ The LC is valid until the payment is processed.
• 📚 For more information about LC and its types, readers are encouraged to read the article linked in the description.
• 🔔 Viewers are reminded to subscribe to the channel for the latest updates on international trade and exports.

Q & A

What is a Letter of Credit (LC) and why is it important in international trade?

A Letter of Credit (LC) is a document issued by a bank on behalf of a buyer, guaranteeing that the seller will receive payment after completing their part of the transaction. It is important in international trade as it builds trust between buyers and sellers across different countries.

Who issues a Letter of Credit and who benefits from it?

A Letter of Credit is issued by a bank on the buyer's behalf. Both the seller and the buyer benefit from it: the seller is ensured they will receive funds, and the buyer can demonstrate their creditworthiness and negotiate longer payment terms.

What happens if the buyer is unable to pay under a Letter of Credit?

If the buyer is unable to pay, the issuing bank is liable to pay the seller.

Can you provide an example to explain how a Letter of Credit works?

For example, Mr. A, an Indian exporter, enters into a contract to sell rice to Mr. B, a U.S. importer. Mr. B goes to his bank to open an LC. The issuing bank sends the LC to Mr. A's bank (the advising bank). After reviewing the terms, the advising bank confirms receipt of the LC to Mr. A. Mr. A then ships the goods and sends the shipment documents to the advising bank, which sends them to the issuing bank. The issuing bank verifies the documents and sends them to Mr. B. Mr. B then makes the payment to Mr. A as per their agreement.

What role does the advising bank play in the Letter of Credit process?

The advising bank confirms the receipt of the LC to the seller after reviewing the terms. It also handles the shipment-related documents sent by the seller and forwards them to the issuing bank.

What happens to the Letter of Credit once the payment is processed?

The Letter of Credit is valid until the payment is processed. Once the payment is made, the transaction under the LC is considered complete.

Why might a seller prefer using a Letter of Credit in international transactions?

A seller might prefer using a Letter of Credit because it ensures they will receive payment, reducing the risk of non-payment by the buyer.

What benefits does a buyer gain from using a Letter of Credit?

A buyer benefits from using a Letter of Credit as it demonstrates their creditworthiness, allowing them to negotiate better payment terms with the seller.

What are the primary banks involved in a Letter of Credit transaction?

The primary banks involved are the issuing bank (the buyer's bank) and the advising bank (the seller's bank).

Where can one find more information about Letters of Credit and their types?

More information about Letters of Credit and their types can be found in the article mentioned in the video description.