Write short note on Letter of Credit.
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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. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.
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* Letter of credit is a financial document or statement issued by the bank that assures timely and complete payment to a seller.
* In case of any discrepancies, the issuing bank is responsible for bearing the loss and making the respective payment on behalf of the customer.
* It is important with respect to both domestic and international trade. The two types include commercial( primary mechanism) and standby( secondary mechanism).
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