Features of Letter of Credit (LC)
1. Payment Guarantee: An LC gives the seller a guarantee that they will be paid.
2. Third-Party Involvement: To facilitate and secure the transaction, at least three parties are involved in any LC, the buyer, the seller and a bank.
3. Costs and Fees: The issue and management of an LC can result in costs and fees for the buyer and seller, including issuance, negotiation and confirmation fees.
4. International Trade: To reduce the risks involved with cross-border transactions, legal system disparities and payment security issues, LCs are frequently used in international trade.
5. Legal Obligation: As long as the submitted documents comply to the terms and conditions stated in the LC, banks are required to fulfil the LCs, which are legally binding agreements.
6. Documentary Transaction: Invoices, bills of shipment, inspection documents and other relevant proof may be required in order for payment to be completed.
7. Terms and Conditions: The terms of the LC include the payment amount, the deadline for presenting papers, the shipment and delivery information and any additional particular requirements that have been agreed upon by the seller and the buyer.