Question

What is a letter of credit? Why does an exporter need this document?

Answer 1

Answer:

Letter of credit :  

Letter of credit documents are related to payment in export transactions.

Letter of credit is a document issued by importer's Bank to the foreign dealer undertaking that the bill drawn by the foreign dealer on the importer will be honoured on presentation to the extent of amount specified therein. The Letter of credit is the documentary evidence of importers credit worthiness.

An exporter needs this document because he is not aware of the financial worthiness and integrate of the importer. In order to protect the exporter from the financial loss arising due to the non payment from the importer, it is always in the interest of exporter to obtain the letter of credit.  

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Answer 2

letter of credit is a guarantee issued by the importer's bank that it will honour up to a certain amount the payment of export bills to the bank of the exporter. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.