In the global landscape people have come up with innovative ways to figure out solutions, interact with one another, provide efficient mechanism to run our system. Letter of credit aims to do exactly that by providing global payment solutions for industries.
People earlier in time had traded before, despite not having access to modern amenities. It was mostly done in physical proximate, face-to-face where payments were traded in exchange for goods. With new tools people have come up with ingenious process to ensure payment and trade without needing to meet both parties in person.
A global framework for banks to apply transactions worldwide is known as ‘letter of credit’. It facilitates payment in such a way where both buyer and supplier are guaranteed payment where both parties are in a ‘win-win’ situation.
When both parties have come to an ‘negotiable’ agreement, then that contract known as sales invoice/proforma invoice is given to the bank by the buyer. The bank then opens a LC on behalf of the buyer and sends this document to the suppliers bank. The suppliers bank approves of this LC and authorizes the buyers bank to start it’s operation. If according to the contract agreed upon by both parties, they fulfill their responsibilities then the final payment is cleared by the banks.
It is an important tool for international trade, where both buyer and sellers who don’t know each other can trade by trusting the whole financial system. This facility has enabled economies to grow ever more faster, ensure development to all regions, and build a prosperous society for the future.
To open an LC with a bank necessary documents will need to be provided. In order to fulfill the contract both parties also need to provide documentary evidence in accordance with the local laws, banking rules as well as International Chamber of Commerce (ICC) procedures.
If you would like more information for global trade financial policy, please check the site iccwbo.org.