How does letter of credit work in international trade?

A letter of credit, also referred to as a documentary credit, is a contractual agreement whereby the issuing bank (importer’s bank), acting on behalf of the customer (the importer or buyer), promises to make payment to the beneficiary or exporter against the receipt of complying stipulated documents.

What is bank credit line?

A line of credit (LOC) is an account that lets you borrow money when you need it, up to a preset borrowing limit, by writing checks or using a bank card to make purchases or cash withdrawals. Available from many banks and credit unions, lines of credit are sometimes advertised as bank lines or personal lines of credit.

What is a back to back LC?

A back-to-back letter of credit involves two letters of credit to secure financing for a single transaction. These are usually used in a transactions involving an intermediary between the buyer and seller. Back-to-back letters of credit are used primarily in international transactions.

How many parties are there in LC?

It guarantees that the payment will be made by the importer subjected to conditions mentioned in the LC. There are 4 parties involved in the letter of credit i.e the exporter, the importer, issuing bank and the advising bank (confirming bank).

Who opens letter of credit?

In this case, Letter of credit is opened by your bank (or other opening bank) and beneficiary of letter of credit is your overseas seller of machinery. Letter of credit is a guarantee given by your bank (not you) to your buyer’s bank on account of your buyer.

How many banks are in letter of credit?

There is a common miss-conception that four or five multiple banks must be involved to manage letter of credit transactions. These multiple banks include credit issuing banks, advising banks, negotiating banks, confirming banks, and reimbursing banks.

Is line of credit a loan?

A line of credit is a flexible loan from a financial institution that consists of a defined amount of money that you can access as needed and repay either immediately or over time. Interest is charged on a line of credit as soon as money is borrowed.

Can you withdraw money from credit line?

It’s similar to using a debit card to withdraw money at an ATM, only the cash is deducted from your credit limit instead of your bank account balance. Most cash advances on credit cards come with a cash advance transaction fee and a higher APR.