Your Idea of LOC
A Letter of Credit is a payment term mostly used for long-distance and international commercial transactions. Letters of credits are indispensable for international transactions since they ensure that payment will be received. Using documentary letters of credit allows the seller to significantly reduce the risk of non-payment for delivered goods, by replacing the risk of the buyer with that of the banks. Letters of credit have become a crucial aspect of international trade, due to differing laws in each country and the difficulty of knowing each party personally.
After trade between countries made it impossible to do business by traditional payment methods, and hence Letters of credit made it possible to do business worldwide by greatly reducing the risk from both the buyer and seller’s perspective.
In modern business world, a letter of credit is basically an undertaking by a bank to make a payment to a named Beneficiary within a specified time, against the presentation of documents which is strictly in compliance with the terms of the letter of credit.
Banks issue letters of credit to ensure sellers that they will get paid if they do what they've agreed to do. Hence letter of credit is a promise to pay.
In this context, the process works both in favour of the buyer and the seller. The instrument is designed to reduce the risk taken by each party. Listed below are a few advantages to provide a bird’s eye view that it is an overall preferred mean of service introduced.