{"id":254,"date":"2018-01-15T11:05:49","date_gmt":"2018-01-15T16:05:49","guid":{"rendered":"http:\/\/www.letterofcredit.biz\/?p=254"},"modified":"2025-02-12T09:50:21","modified_gmt":"2025-02-12T14:50:21","slug":"what-is-letter-of-credit","status":"publish","type":"post","link":"https:\/\/www.letterofcredit.biz\/index.php\/2018\/01\/15\/what-is-letter-of-credit\/","title":{"rendered":"What is a Letter of Credit"},"content":{"rendered":"\n<p>Letter of credit, in a broad perspective, is one of the payment methods in international trade.<\/p>\n\n\n\n<p>The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.<\/p>\n\n\n\n<p>A documentary credit, also known as a letter of credit, is a written guarantee issued by a bank (issuing bank) on behalf of a buyer (applicant) to pay the seller (beneficiary) a specified amount, either at sight or on a future date. <\/p>\n\n\n\n<p>This payment commitment is subject to the beneficiary\u2019s compliance with the terms and conditions outlined in the credit and is fulfilled through a \u2018<a href=\"https:\/\/www.letterofcredit.biz\/index.php\/2018\/06\/05\/complying-presentation\/\" data-type=\"post\" data-id=\"2064\"><strong>complying presentation<\/strong><\/a>\u2019.<\/p>\n\n\n\n<p>According to the Uniform Customs and Practice for Documentary Credits (<strong><a href=\"https:\/\/www.letterofcredit.biz\/index.php\/2018\/10\/19\/ucp-600\/\" data-type=\"post\" data-id=\"3047\">UCP 600<\/a><\/strong>), a complying presentation must meet three key requirements:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Documents must strictly adhere to the terms and conditions of the documentary credit.<\/li>\n\n\n\n<li>If the credit is governed by UCP 600, documents must align with its applicable articles and sub-articles.<\/li>\n\n\n\n<li>Documents are reviewed based on latest version of international standard banking practices, ISBP 821 (International Standard Banking Practice for the Examination of Documents under UCP 600).<\/li>\n<\/ul>\n\n\n\n<p>Understanding these principles ensures smooth international trade transactions and minimizes payment risks.<\/p>\n\n\n\n<!--more-->\n\n\n\n<p>Some of the other payment methods in international trade are <strong><a href=\"https:\/\/www.letterofcredit.biz\/index.php\/2018\/10\/27\/cash-in-advance-payment\/\" data-type=\"post\" data-id=\"3189\">Cash-in-Advance<\/a><\/strong>, <strong><a href=\"https:\/\/www.letterofcredit.biz\/index.php\/2018\/10\/26\/documentary-collections-cash-against-documents-cad\/\" data-type=\"post\" data-id=\"3153\">Documentary Collections<\/a><\/strong> and <strong>Open Account<\/strong>.<\/p>\n\n\n\n<p><strong>Important Note: <\/strong>The Bank Payment Obligation (BPO) was once considered an alternative to the letter of credit but was not widely accepted by market practitioners and is no longer in use.<\/p>\n\n\n\n<p>All of these payment methods inherit different risk levels for exporters and importers.<\/p>\n\n\n\n<p>For example, if you choose Open Account payment method as an exporter, you will have to burden almost all of the non-payment risk by yourself, unless you secure the payment with another guarantee such as export credit insurance.<\/p>\n\n\n\n<p>Perhaps, letter of credit is the only payment method, which has a balanced risk structure for both parties, namely exporters and importers.<\/p>\n\n\n\n<p>Figure 1: Payment Risk Diagram<\/p>\n\n\n\n<figure data-wp-context=\"{&quot;imageId&quot;:&quot;69da469390fa2&quot;}\" data-wp-interactive=\"core\/image\" data-wp-key=\"69da469390fa2\" class=\"wp-block-image wp-image-256 size-full wp-lightbox-container\"><img decoding=\"async\" width=\"870\" height=\"385\" data-wp-class--hide=\"state.isContentHidden\" data-wp-class--show=\"state.isContentVisible\" data-wp-init=\"callbacks.setButtonStyles\" data-wp-on--click=\"actions.showLightbox\" data-wp-on--load=\"callbacks.setButtonStyles\" data-wp-on-window--resize=\"callbacks.setButtonStyles\" sizes=\"(max-width: 870px) 100vw, 870px\" src=\"http:\/\/www.letterofcredit.biz\/wp-content\/uploads\/payment-types-in-international-trade.gif\" alt=\"international payment methods and risk levels\" class=\"wp-image-256\"\/><button\n\t\t\tclass=\"lightbox-trigger\"\n\t\t\ttype=\"button\"\n\t\t\taria-haspopup=\"dialog\"\n\t\t\taria-label=\"Enlarge\"\n\t\t\tdata-wp-init=\"callbacks.initTriggerButton\"\n\t\t\tdata-wp-on--click=\"actions.showLightbox\"\n\t\t\tdata-wp-style--right=\"state.imageButtonRight\"\n\t\t\tdata-wp-style--top=\"state.imageButtonTop\"\n\t\t>\n\t\t\t<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"12\" height=\"12\" fill=\"none\" viewBox=\"0 0 12 12\">\n\t\t\t\t<path fill=\"#fff\" d=\"M2 0a2 2 0 0 0-2 2v2h1.5V2a.5.5 0 0 1 .5-.5h2V0H2Zm2 10.5H2a.5.5 0 0 1-.5-.5V8H0v2a2 2 0 0 0 2 2h2v-1.5ZM8 12v-1.5h2a.5.5 0 0 0 .5-.5V8H12v2a2 2 0 0 1-2 2H8Zm2-12a2 2 0 0 1 2 2v2h-1.5V2a.5.5 0 0 0-.5-.5H8V0h2Z\" \/>\n\t\t\t<\/svg>\n\t\t<\/button><\/figure>\n\n\n\n<p>As I have explained above, letters of credit can limit the risks of both importers and exporters.<\/p>\n\n\n\n<p>However, how can letters of credit achieve a balanced payment status?<\/p>\n\n\n\n<p>Letters of credit can balance the risks of both exporters and importers, because responsibility of L\/C operations is given to a third party, to the banks.<\/p>\n\n\n\n<p>I will explain this later on in detail. But now it is time to make a definition of a letter of credit.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><a href=\"https:\/\/youtu.be\/V2xqjJA8X3M\" target=\"_blank\" rel=\" noreferrer noopener\"><img data-dominant-color=\"dfe1e4\" data-has-transparency=\"false\" style=\"--dominant-color: #dfe1e4;\" decoding=\"async\" width=\"721\" height=\"405\" sizes=\"(max-width: 721px) 100vw, 721px\" src=\"https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/image-1-png.webp\" alt=\"youtube video link lc definition\" class=\"wp-image-7846 not-transparent\" srcset=\"https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/image-1-png.webp 721w, https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/image-1-300x169.webp 300w\" \/><\/a><\/figure>\n<\/div>\n\n\n<h2 class=\"wp-block-heading\">Definition of a Letter of Credit:<\/h2>\n\n\n\n<p>&#8220;Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.&#8221; (UCP 600, article 2)<\/p>\n\n\n\n<p>Above letter of credit definition is taken from the UCP 600 (Uniform Customs and Practice for Documentary Credits) which is the latest version of the rules published by ICC (International Chamber of Commerce) regulating the letters of credit operations all around the world.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Role of the ICC and UCP in Letters of Credit<\/h2>\n\n\n\n<p>International trade is exchange of capital, goods, and services across international borders between people who belong to different languages, cultures and laws.<\/p>\n\n\n\n<p>As letters of credit are a payment method of international trade it is obvious that standardized rules are needed to govern letters of credit in a global scale to make sure that letters of credit transactions run smoothly.<\/p>\n\n\n\n<p>ICC, International Chamber of Commerce, is the organization that publishes the standardized rules. The rules, which are called UCP, Uniform Customs and Practice for Documentary Credits, are revised regularly.<\/p>\n\n\n\n<p>At the time of this text is written sixth version of the UCP rules is in force.<\/p>\n\n\n\n<figure data-wp-context=\"{&quot;imageId&quot;:&quot;69da469391eaa&quot;}\" data-wp-interactive=\"core\/image\" data-wp-key=\"69da469391eaa\" class=\"wp-block-image size-full wp-lightbox-container\"><img decoding=\"async\" width=\"636\" height=\"428\" data-wp-class--hide=\"state.isContentHidden\" data-wp-class--show=\"state.isContentVisible\" data-wp-init=\"callbacks.setButtonStyles\" data-wp-on--click=\"actions.showLightbox\" data-wp-on--load=\"callbacks.setButtonStyles\" data-wp-on-window--resize=\"callbacks.setButtonStyles\" sizes=\"(max-width: 636px) 100vw, 636px\" src=\"https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/icc-and-ucp-in-letter-of-credit.png\" alt=\"icc and ucp in letters of credit\" class=\"wp-image-264\" srcset=\"https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/icc-and-ucp-in-letter-of-credit.png 636w, https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/icc-and-ucp-in-letter-of-credit-300x202.png 300w, https:\/\/www.letterofcredit.biz\/wp-content\/uploads\/icc-and-ucp-in-letter-of-credit-624x420.png 624w\" \/><button\n\t\t\tclass=\"lightbox-trigger\"\n\t\t\ttype=\"button\"\n\t\t\taria-haspopup=\"dialog\"\n\t\t\taria-label=\"Enlarge\"\n\t\t\tdata-wp-init=\"callbacks.initTriggerButton\"\n\t\t\tdata-wp-on--click=\"actions.showLightbox\"\n\t\t\tdata-wp-style--right=\"state.imageButtonRight\"\n\t\t\tdata-wp-style--top=\"state.imageButtonTop\"\n\t\t>\n\t\t\t<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"12\" height=\"12\" fill=\"none\" viewBox=\"0 0 12 12\">\n\t\t\t\t<path fill=\"#fff\" d=\"M2 0a2 2 0 0 0-2 2v2h1.5V2a.5.5 0 0 1 .5-.5h2V0H2Zm2 10.5H2a.5.5 0 0 1-.5-.5V8H0v2a2 2 0 0 0 2 2h2v-1.5ZM8 12v-1.5h2a.5.5 0 0 0 .5-.5V8H12v2a2 2 0 0 1-2 2H8Zm2-12a2 2 0 0 1 2 2v2h-1.5V2a.5.5 0 0 0-.5-.5H8V0h2Z\" \/>\n\t\t\t<\/svg>\n\t\t<\/button><\/figure>\n\n\n\n<p>In this first article, we have understood what letter of credit is, its definition, the rules that apply to them and the organization that publishes these rules.<\/p>\n\n\n\n<p>In the next article, I will examine <a href=\"https:\/\/www.letterofcredit.biz\/index.php\/2018\/01\/15\/types-of-letters-of-credit\/\"><strong>types of letters of credit<\/strong><\/a>.<\/p>\n\n\n\n<div class=\"wp-block-group alignfull has-text-color has-background\" style=\"color:#000000;background-color:#ffffff\"><div class=\"wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow\">\n<div style=\"height:64px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-text-align-center has-small-font-size\" style=\"line-height:.9\"><strong>\u00d6ZG\u00dcR EKER (CDCS)<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\" style=\"font-size:32px\"><strong>Letter of Credit Consultancy Services<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-499968f5 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button has-custom-width wp-block-button__width-50\"><a class=\"wp-block-button__link has-text-color has-background wp-element-button\" href=\"https:\/\/www.letterofcredit.biz\/index.php\/contact-us\/\" style=\"border-radius:50px;color:#ffffff;background-color:#000000\">Contact us<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:64px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Letter of credit, in a broad perspective, is one of the payment methods in international trade. The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules. A documentary credit,<\/p>\n","protected":false},"author":1,"featured_media":266,"comment_status":"open","ping_status":"open","sticky":true,"template":"","format":"video","meta":{"footnotes":""},"categories":[22,528],"tags":[23],"class_list":["post-254","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-basics","category-what-is-letter-of-credit","tag-letter-of-credit-definition","post_format-post-format-video"],"_links":{"self":[{"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/posts\/254","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/comments?post=254"}],"version-history":[{"count":0,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/posts\/254\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/media\/266"}],"wp:attachment":[{"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/media?parent=254"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/categories?post=254"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.letterofcredit.biz\/index.php\/wp-json\/wp\/v2\/tags?post=254"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}