In international banking, a letter of credit is a promise by a bank to pay the seller a given amount if certain conditions are met.
How Does a Letter of Credit Work?
A letter of credit is frequently used in international trade to guarantee that a payment will be made to the seller promptly and in full, as guaranteed by a bank or other financial institution. In addition to requesting security from the buyer, the bank will charge a fee after providing a letter of credit, which is ordinarily a percentage of the letter of credit. Revolving, commercial, and confirmed letters of credit are a few examples of the different kinds of letters of credit.
What is the disadvantage of a letter of credit?
Inordinately costly, time-consuming, and laborious in terms of working capital and credit line usage. To satisfy the bank's coverage requirements for the buyer, additional security and collateral are required. Lengthy and time-consuming claims process that requires the seller to submit extra documents.
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