Ever heard of documented letters or letters of credit? A documented credit letter is a statement issued by the bank based on the request of the applicant who is also the customer of the bank.
This letter of credit is made as a form of request for the provision of funds in a certain amount for the benefit of the beneficiary .
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What is a Documented Credit Letter?
Documented Credit Letters or often referred to as Letter of Credit (LC) are documents issued by banks to support domestic trade transactions.At the request of the applicant , the bank can issue an LC that promises that the bank will pay a certain amount of funds to the beneficiary if the bank receives the documents in accordance with the requirements of the bank.
Usually, LC is used to finance contracts for the sale of goods that last long distances. Or if the buyers and sellers don’t know each other too well.In general, LC is used for trade transactions in international scope. However, it should be noted that this LC is not a securities that can be used as a warranty or handover.
Legal Relations in a Documented Credit Letter
LC can be interpreted as debt securities, accounts receivable, or bill. However, actually the meaning is not really right.
LC is more appropriate if it is said as a letter of agreement that a certain payment will be made after fulfilling the conditions that have been determined.
In this case, LC is a payment promise made by the issuing bank or other bank for the recipient at the request of the applicant.
Furthermore, the applicant promised to repay the funds to the LC issuing bank.
In its transaction practice, LC has several main legal relationships, namely:
- Legal relationship between the buyer as the applicant and the seller as the recipient that refers to the matters contained in the sales contract.
- Legal relationship between the applicant and the issuing bank LC based on issuance of LC as a contract.
- Legal relationship between the issuing bank and the recipient of the fund based on the LC as a contract reference.
- Legal relations between LC issuing banks and successor banks based on agency contracts.
- Legal relationship between successor banks and recipients of funds based on LC payment contracts.
Parties involved in Documented Credit Letters
In issuing a Letter of Credit (LC), there are several main parties that have interests.
# 1 Importer / Buyer
Importer or buyer is the party making an application to the bank for issuance of LC.
As a party that carries out buying and selling transactions with exporters, importers have several obligations, ranging from sending letters to exporters abroad and also receiving reply letters along with brochures from exporters.
In addition, the importer is also obliged to prepare LC issuance requests and also prepare cash payments for LC issuing banks.
# 2 LC Issuing Bank
LC issuing bank has the duty to issue LC. In addition, the bank also has an obligation to receive, record and also examine the issuance of LC.
The bank also has the responsibility to provide foreign exchange at the request of the importer and carry out a letter change request.Then, the bank is also tasked to receive cash deposits from the importer a number of LC values as repayment.
# 3 Successor Banks
Successor banks can be referred to as negotiating banks if they have the power to buy money orders drawn by exporters. It can also be referred to as bank confirming if asked to guarantee payment.
In practice, the successor bank is tasked with forwarding the LC to the exporter, receiving the required documents from the exporter, and paying the price of the goods to the exporter in accordance with the agreements and terms contained in the LC.
# 4 Exporter / Seller
Exporters are those who carry out buying and selling transactions with importers.In this case, the exporter has the responsibility to receive and reply to letters from the importer and receive LC from the successor bank.
Furthermore, the exporter needs to prepare goods according to the request of the importer and submit the documents in accordance with what is required in the LC.
After that, the exporter can receive payment money from the importer through the successor bank.
Credit Letters with Important Documents for Import-Export Activities
Those are some things about the Letter of Credit (LC) that you need to know.To support buying and selling transactions between exporters and importers, the existence of LC is indeed very helpful.By having an LC, both sellers and buyers alike have guaranteed security of transactions.
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