Documentary Credit (Letter of Credit - LC)

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As indicated below, the seller may receive payment in advance or ship the goods on the mare promise of the buyer to pay either at the time of delivery or at a certain future date after delivery of the goods.

To ensure a better arrangement of payment, the seller may request the buyer to make payment through a documentary credit.

A documentary credit also known as a letter of credit or L/C, is an undertaking in writing given by the buyer's bank in which the buyer's bank guarantees payment to the beneficiary seller on condition that the beneficiary seller presents the stipulated documents and strictly complies with the terms and conditions mentioned in the documentary credit.

We will discuss in greater details on the advantages and disadvantages of a documentary credit, how its works and the various types of documentary credit in the next chapter.

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