L/C is a popular and important tool in the field of international trade. This tool helps ensure safety in the process of trading goods and services between participating parties. So what is L/C? Please join SeABank to find out in the article below!

What is L/C?

What is the concept of L/C?

L/C is a legal document issued by a bank, at the request of the importer, committing to pay the agreed amount to the exporter (seller) within a fixed period of time, in case the seller presents a set of documents that comply with the valid conditions specified in the file.

L/C, also known as a letter of credit, represents the bank's commitment to the importer to pay the exporter. When signing the commitment, there may still be a lack of trust between the parties, so these payments will help the partners feel secure about their own rights.

L/C is a payment method that helps ensure the rights of both the buyer and seller.

In addition to the above concepts, many customers still wonder what a domestic L/C is and what an import L/C is. A domestic L/C is a deferred payment domestic letter of credit that can be paid before the due date to serve the production and business needs of customers. An import L/C is a letter issued by a bank, in which the importer commits to pay the exporter a certain amount within a specific period of time.

The nature of L/C

L/C - Documentary credit is a form of payment related to the presentation of valid documents. The exporter is guaranteed full payment if the appropriate documents are presented to the bank. Payment by documentary credit is also understood as the advance payment that banks give to the exporter or importer.

There are two important issues about L/C that you need to understand clearly:

Only banks or other credit institutions are allowed to perform this type of transaction.
Because of the banking monopoly, this transaction only takes place regularly by credit institutions.

What does the L/C payment method mean?

Is a promise to accept payment of money or to pay money.
Issued by one party but can have many beneficiaries. In particular, the issuer of the document must be a banking institution.
The basis for payment of documentary credit is the documents stated in the L/C.
Is a commitment to pay with terms and conditions.
Chosen by many banks and companies because L/C fully meets the essential requirements in international trade.
Since many contracting partners have offices in different countries, there is a lack of trust between the parties and payment by documentary credit helps to remove those barriers.
During the L/C transaction process, there is always the presence of the banking institutions of both parties combined with many strict requirements of the set of documents. These factors help to harmonize the interests between the parties.

Payment by L/C helps both buyers and sellers to increase mutual trust.

Classification of letters of credit L/C

There are many ways to classify letters of credit, depending on the relationship, trust and credibility between the two parties. The following are the classification criteria and some types of L/C widely used today:

L/C Classification Criteria	Common types of L/C
Bank commitment validity	1. Irrevocable L/C: Once issued by the bank, no individual has the right to modify, supplement or cancel during its validity without the consent of the relevant parties.	2. Revocable letter of credit: This is a type of letter of credit that the importer can amend, supplement or cancel after opening without prior notice to the beneficiary. However, this type of letter is rarely used because a revocable documentary credit is a promise without commitment and does not guarantee certainty.
Time of execution	1. L/C at sight: This is the simplest type of L/C. The payment process is carried out quickly by the bank based on the documents that have been presented and checked.	2. Term L/C: Is a type of letter of credit that pays the beneficiary at the end of a fixed period (usually after the shipping date).

The following are the types of letters of credit commonly used by the parties:

L/C is revocable.
Irrevocable L/C.
Confirmed L/C.
Transferable L/C.
Back to back L/C
Circulating L/C.
Standby L/C.
Correspondence L/C.
L/C has red clause.

Main contents of L/C

The L/C contract will include the following main contents:

Number, location (where the organization issuing the L/C commits to pay the seller), L/C opening date (the date the L/C becomes effective).
L/C type.
Name and address of the parties involved: Exporter, importer, L/C issuing bank.
Amount and currency.
Validity period, payment period, delivery period.
Regulations on delivery terms: place of delivery and delivery conditions,...
Documents the exporter needs to present.
Commitment of the L/C issuing organization.
And other content,...

Main contents of L/C that customers need to know

Conditions for opening L/C

To successfully register to open an L/C, the business needs to submit the following documents to the bank:

Business license.
Foreign currency bank account.
Decision to establish a company.
Decision to appoint two positions: Director & Chief Accountant.

Fileopen L/C

Application for opening L/C includes:

Application for opening L/C.
For businesses conducting transactions for the first time, it is necessary to prepare a company establishment decision, business registration certificate, and import-export code registration certificate (if any).
Foreign trade contract (original).
Entrusted import contract (if any).
Import certificate issued by the Ministry of Commerce (if any)
Payment commitment and loan contract as well as approval letter for opening deferred payment L/C from NHCTVN.
Foreign currency purchase and sale contracts (if any).
The L/C opening explanation drafted by the branch credit department is reviewed and approved by the branch director or an individual authorized by the director.

Benefits of L/C for the parties

Benefits for the exporter:

The bank will guarantee the payment obligation as prescribed regardless of whether the importer wants to pay or not.
Minimize delays in document transfer.
Payment takes place as soon as the documents are delivered to the issuing bank or the deferred payment L/C is paid at a specified time.
To cover the cost of performing the contract, the exporter may request an L/C discount.

L/C helps the exporter to still receive money whether the importer pays or not.

Benefits for the importer:

The importer only pays upon receipt of the goods.
To ensure that the exporter gets paid, the importer must comply with the provisions mentioned in the L/C.

Limitations and notes when using L/C

Check if the documents match the L/C.
The bank is only responsible for checking documents and not checking goods, so there are still cases of poor quality goods.
The importer must deposit a sum of money (up to 100% of the contract value).

Letter of credit L/C plays a key role in building trust and ensuring the rights of parties in international transactions. Hopefully, this article has helped you understand the concept of L/C and the benefits that L/C brings. Follow SeABank now to update more useful financial knowledge!