What is a credit letter?

A Charne letter is a letter from a bank that guarantees that the buyer's payment to the seller will be received in time and for the correct amount. If the buyer is unable to make a purchase for the purchase, the bank is obliged to cover the full or remaining amount of purchase. The credit letter is often shortened as a LOC or LC and is also referred to as documentary credit . The parties of this document are usually an applicant who wants to send money, a recipient who receives money, issuing a bank and an advisory bank.

International transactions often use credit letters to ensure payment of payment. They have become an important aspect of international trade, because of different laws in each country and difficulty to personally know each side. The bank also acts on behalf of the Buyer or the letter holder, and that the supplier will not be paid until the bank receives the confirmation that the goods have been sent to the bee.

Charnie letter is often confused with BApart warranty, which is in many ways similar, but not the same thing. The main difference is the position of the bank in relation to the buyer and the seller of good or service in the case of the default payments of the buyer. With the form of a loan, the seller may ask for the buyer to provide them with a letter obtained from a bank that replaces the bank's credit for the client.

In the case of a debtor's failure, the seller can go to the buyer's bank for the payment. Instead of the risk that the buyer will not pay, the seller only faces the risk of the bank will not be able to pay, which is unlikely. This means that if the applicant has obtained a letter fulfills his obligations, the bank must pay. The letter may also be a source of payment for the transaction, which means that the exporter will be paid by redemption. This type of warranty is less risky for the trader, but more risky for the bank.