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Although in use for centuries, the application of international letters of credit (LCs) is certain to be on the rise given today's expanding global economy. Utilized in a variety of large commercial transactions, they serve primarily as the monetary replacement in an international exchange of goods or services.
An issuing bank, of which the purchaser is a client, issues payment on behalf of the purchaser, while the advising bank operates on behalf of the receiver (the seller) who provided the goods or services purchased, and receives the money.
The international letter of credit specifies the documentation required at time of payment to substantiate that the goods were shipped, or that the service was provided. This documentation is provided by the beneficiary via the advising bank. The issuing bank bears no responsibility for verifying that the actual merchandise reached the buyer, they are only concerned that the documentation presented meets the requirements as set forth in the LC.
Once a letter of credit is issued, it cannot be altered or annulled, except with the explicit agreement of all parties involved, with the entire process following the code set by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits.
For further information on international letters of credit and whether your business can benefit from their use, be sure to reference Business.com.