Difference between revisions of "Letter of credit"

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(LC).  
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(LC or sometimes LOC).  
  
 
A promise document issued by a bank or another issuer to a third party to make a payment on behalf of a customer in accordance with specified conditions.  
 
A promise document issued by a bank or another issuer to a third party to make a payment on behalf of a customer in accordance with specified conditions.  
  
 
Letters of credit are frequently used in international trade to make funds available in a foreign location.
 
Letters of credit are frequently used in international trade to make funds available in a foreign location.
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==== Letter of credit contrasted with documentary collection ====
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Letters of credit are often contrasted, from the perspective of a seller, with an alternative structure of [[documentary collection]]s.
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A letter of credit is a ''direct'' obligation of a bank to pay (against specified documents).
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A documentary collection means a bank ''collecting'' payment from the buyer (by presenting documents to the buyer).
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A letter of credit therefore gives superior protection to the seller against credit risk or delayed cash flow, or both.
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For this reason letters of credit are more expensive to arrange.
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Compared with documentary collections (DCs), letters of credit (LCs) are used for larger transactions, and a larger total value of transactions.
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LC and DC indicative data is summarised below.
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=====Average transaction sizes (US exports)=====
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LCs: US$ 0.5 - 1 million
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DCs: US$ 0.1 - 0.2 million
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=====Proportion of world trade in goods=====
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LCs: 10 - 15%
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DCs: 1 - 2%
  
  
 
== See also ==
 
== See also ==
 
* [[Advising bank]]
 
* [[Advising bank]]
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* [[Bank payment obligation]]
 
* [[Clean letter of credit]]
 
* [[Clean letter of credit]]
 
* [[Commercial risk]]
 
* [[Commercial risk]]
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* [[Confirming bank]]
 
* [[Confirming bank]]
 
* [[Credit]]
 
* [[Credit]]
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* [[Documentary collection]]
 
* [[Documentary credit]]
 
* [[Documentary credit]]
 
* [[Irrevocable letter of credit]]
 
* [[Irrevocable letter of credit]]
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* [[LOC backed]]
 
* [[LOC backed]]
 
* [[Standby letter of credit]]
 
* [[Standby letter of credit]]
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* [[Trade finance]]
 
* [[Uniform Customs and Practice for Documentary Credits]]
 
* [[Uniform Customs and Practice for Documentary Credits]]
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* [[Usance letter of credit]]
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===Other links===
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[http://voxeu.org/article/trade-finance-around-world Trade finance around the world, Centre for Economic and Policy Research, 2016]
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__NOTOC__
  
==Other links==
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[[Category:Manage_risks]]
[http://www.treasurers.org/node/5279 Letters of credit and supply chain finance, Will Spinney, ACT 2009]
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[[Category:Risk_frameworks]]
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[[Category:Trade_finance]]

Latest revision as of 14:59, 1 May 2018

(LC or sometimes LOC).

A promise document issued by a bank or another issuer to a third party to make a payment on behalf of a customer in accordance with specified conditions.

Letters of credit are frequently used in international trade to make funds available in a foreign location.


Letter of credit contrasted with documentary collection

Letters of credit are often contrasted, from the perspective of a seller, with an alternative structure of documentary collections.

A letter of credit is a direct obligation of a bank to pay (against specified documents).

A documentary collection means a bank collecting payment from the buyer (by presenting documents to the buyer).


A letter of credit therefore gives superior protection to the seller against credit risk or delayed cash flow, or both.

For this reason letters of credit are more expensive to arrange.


Compared with documentary collections (DCs), letters of credit (LCs) are used for larger transactions, and a larger total value of transactions.

LC and DC indicative data is summarised below.

Average transaction sizes (US exports)

LCs: US$ 0.5 - 1 million

DCs: US$ 0.1 - 0.2 million

Proportion of world trade in goods

LCs: 10 - 15%

DCs: 1 - 2%


See also


Other links

Trade finance around the world, Centre for Economic and Policy Research, 2016