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Explain Letters of Credit

Letters of Credit: It is a binding document which a buyer can request from his bank in order to pledge that the payment for goods will be moved to the seller. Principally, a letter of credit provides the seller reassurance that he will obtain the payment for goods. In order for the payment to take place, the seller has to present the bank with essential shipping documents confirming the shipment of goods in a specified time frame. It is frequently employed in international trade to remove risks like unfamiliarity with the foreign customs, country, or political instability.

Letters of credit are frequently employed in international transactions to make sure that payment will be received. Due to the nature of international dealings comprising factors like distance, differing laws in each and every country and complexity in knowing each party personally, the utilization of letters of credit has become a very significant aspect of international trade. The bank too acts on behalf of the buyer (that is, holder of letter of credit) by making sure that the supplier will not be paid till the bank receives a confirmation which the goods have been shipped.

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