Definition of Letter of Credit

A letter of credit it's a means of payment commonly used in the environment commercial to carry out transactions, especially those of an international nature and that involve imports. Through it it is possible to make a payment to a third party, who is the one who sells a certain merchandise to another. Meanwhile, the buyer of that merchandise extends a letter of credit, Bank through, so that the payment of the purchased merchandise is fulfilled.

Once the letter of credit is closed with the conditions that have been indicated, it cannot be revoked unilaterally, but there must be an agreement of all those involved in order to give way to any modification in her.
And another characteristic is that it is nominative, that is, it makes express mention of the banking entities involved in it, that is, the who have the authorization to carry out the operation, which prevents any last minute changes from being made in this appearance.

Is in the exchange, in the foreign trade

, where this payment instrument is mostly used, since it is considered the safest means of payment because it ensures the collection for those who are selling merchandise or raw materials.

A fundamental issue is that the letter of credit is effective once the buyer receives his purchase as approved. From that reception, the entire mechanism involved in this payment method begins to roll.

In the transaction, in addition to buyer and seller, two financial entities are involved, on the one hand the one that issues the letter, and on the other the one that is the one that will receive the payment once it has been developed ok all the transaction.

It should be noted that certain clauses are stipulated in that transaction and whoever is the originator of the letter will be required to present according to a series of documents, including the invoice for the purchase of the goods or merchandise, and, if applicable, the authorizations of the customs.

Although as we indicated it is in the International Trade where this means of payment is mostly used, also in the Commerce local can be used at the request of buying and selling operations.

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