A Letter of credit or an LC is an effective method of expediting easy domestic and international trade transactions between two parties by ensuring efficient payment. This is done by a bank or a financial institution acting as a third party between the buyer and the seller, wherein the bank guarantees the payment on fulfilment of the terms and conditions mentioned in the Letter of Credit.
Different kinds of transactions demand different types of Letters of Credit. That’s why LCs can be divided into a number of categories on the basis of their purpose. These categories include commercial LCs, export, and import LCs, transferable and non-transferable LCs, revocable and irrevocable LCs, confirmed and non-confirmed LCs, etc. Another kind of important Letter of Credit is the Standby Letter of Credit or SBLC. It is a legal document that serves as an assurance of payment from the bank of the buyer to the seller in case the purchaser fails to make the payment on time. This kind of guarantee from a genuine financial body assures the seller to go ahead with the transaction; this eases the entire process of the trade transaction. The Standby Letter of Credit is highly beneficial in case of transactions involving parties that are unknown to each other and belong to geographical areas with separate laws and regulations.
These kinds of LCs can be further divided into Performing and Non-Performing Letters of Credit.
The Performing SBLC is highly common and ensures that the concerned party will finish the project within the timeline mentioned in the contract. Any other kind of SBLC comes under the category of Non-Performing Letter of Credit.
Even though a Standby Letter of Credit ensures that the seller receives the timely payment and the buyer receives the delivery of goods, it does not ensure that the buyer will be happy and satisfied with the quality of the goods.
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