Saturday, April 21, 2012

What is a Letter of Credit?

What is a Letter of Credit?

Generally in accounting terms, a letter of credit is a certified document that a bank or other type of financial institution will issue to a seller. This financial document provides that the issuer will pay the seller for goods or services that the seller in fact delivers to a third-party buyer.

Basically, the letter of credit is a guarantee to the seller that it will be paid on time by the issuer of the letter of credit. This will happen regardless of whether the buyer ultimately fails to pay the seller of goods or services directly.

After the letter of credit is issued, the issuer can seek reimbursement from the buyer or from the buyer's bank or other financial institution.   Therefore, the risk that the buyer will fail to pay the seller is transferred from the seller to the letter of credit's issuing institution.

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karvsmith said...
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