A letter of credit is an instrument that a trade financier issues to a seller of goods which promises that the issuer will pay the seller for goods when the seller delivers the goods or ships the goods to the buyer. The issuer then seeks reimbursement from the buyer or from the buyer’s bank. The letter of credit document is essentially a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay the issuer. The risk that the buyer will fail to pay is transferred from the seller to the issuer of the letter of credit.
Letter of credit
What is a letter of credit? A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount provided its terms are fulfilled. This gives seller’s comfort that if they fulfil a contract of sale that they will be paid, and this assurance comes from the bank lending its financial support to the transaction at the request of the buyer
The use of letters of credit is very important in cross border transactions as it is difficult for parties, such as the buyer and seller, to have be certain that each other will fulfil the terms of the contract of sale, and the use of a financial intermediary (usually a bank) gives certainty on this key element of the contract.
For all your queries on letters of credit, please contact one of our banking and finance solicitors.
Irrevocable letter of credit
An irrevocable letter of credit is a financial instrument issued by a bank that guarantees a buyers obligation to a seller. An irrevocable letter of credit cannot be cancelled, nor modified, except with the explicit agreement of all parties involved such as the buyer, the seller and the issuing bank.
Usance letter of credit
An usance letter of credit can also be known as a deferred letter of credit. It will be a letter of credit that is payable at a predetermined or future point following the conditions in the letter of credit being fulfilled and the confirming documents being presented.
Please contact one of our banking and finance solicitors to assist with your all your queries on an usance letter of credit.
Advantages and disadvantages of letters of credit
If you are a buyer or a seller before you consider using a letter of credit you should weigh up the advantages and disadvantages of a letter of credit.
Contact one of our expert team for advice today. We are here to help.