Parties Involved, Types and Essential Documents
A Letter of Credit (LC) acts as a critical independent undertaking from an issuing bank. Specifically, it guarantees that the beneficiary receives their payment once they fulfil all specified terms. Even if the buyer refuses to pay, the bank maintains its promise to honor the transaction. Therefore, importers typically request these credits to provide sellers with financial security upon meeting the agreed requirements.
The letter of credit can be used for both inland and cross-border trade. It is normally issued by the buyer’s bank as an undertaking to the seller.Â
Parties Involved in a Letter of Credit
Successful trade finance depends on several key participants. Each role ensures security and transparency throughout the transaction:
Applicant: This is the buyer or importer. They request the bank to open the LC on their behalf.
Beneficiary: This is the seller or exporter. They receive payment after presenting documents that match the LC terms.
Issuing Bank: This bank opens the credit and takes responsibility for paying the beneficiary.
Advising Bank: Operating in the exporter’s country, this bank verifies the LC's authenticity for the seller.
Confirming Bank: This bank adds its own guarantee to the LC. This provides the seller with an extra layer of security, especially in high-risk international trade.
Nominated Bank: The issuing bank authorises this institution to receive documents and pay the exporter.
Reimbursing Bank: This bank settles claims from the negotiating bank, usually through the issuing bank’s Nostro account.
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