What is a Letter Of Credit

A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

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Important Features of Letter Of Credit

Types of Letters of Credit

A commercial letter of credit is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

A revolving letter of credit lets the customer make any number of draws within a certain limit during a specific time period. A traveler’s letter of credit guarantees the issuing banks will honor drafts made at certain foreign banks.

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.

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Documents Required For Applying to Bank for Cash Credit

ID proof : Pan card/ Passport/c Driving License

Signature Proof : Pan card/ Passport/Driving License

Age Proof : Pan card/ Passport/Driving License/DOB Certificate

Residence Proof : Passport/ Voter Card/Driving License/Ration Card/ Telephone Bill.

Office Proof : Telephone Bill/ Sales Tax registration certificate/ Electricity Bill

Ownership Proof : Electricity Bill/house tax/property papers Income Proof : last 3 years audited financial along with audit report with all

Bank statement : main account last 6 month. Sanction letter of existing Cash credit or overdraft limit availed by the company.

Collateral Security : Property papers which are offered.

Constitution proof : MOA/ partnership deed

Others : any Govt. registration like service tax, sales Tax, excise,

Loan Proof : Repayment Schedule of all running loans.


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