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Letter of Credit (L/C) - Coggle Diagram
Letter of Credit (L/C)
What is L/C?
A bank guarantees payment to the seller if conditions are met.
Reduces payment risk for both buyer and seller.
A financial instrument used in international trade.
Pros & Cons
Pros
Ensures payment security for the seller.
Helps buyers gain trust from suppliers.
Reduces default risk in international transactions.
Cons
High fees and banking costs.
Complex documentation process.
Risk of delayed payment due to discrepancies.
Types
Irrevocable vs. Revocable
Confirmed vs. Unconfirmed
Sight vs. Usance (Deferred Payment)
Standby L/C (Backup payment guarantee)
Back-to-Back L/C (For intermediaries)
Red Clause & Green Clause L/C (Partial advance payment)
Procedure
Buyer & seller agree to use L/C.
Buyer requests their bank to issue L/C.
Issuing bank sends L/C to the seller’s bank.
Seller ships goods & submits documents.
Bank checks documents & releases payment.
Buyer repays the issuing bank.