Letter of Credit

A letter of credit is an official document which is issued by a company or business to assure another party (seller, vendor) that the goods or services have been received and soon the buyer will pay the amount he owes in return of that services or products. This is a document that proves that the seller or manufacturer has finished his services or deliveries according to the mutual agreement and now he deserves to be paid as soon as possible and he definitely will be. Although sometime the purchaser can’t arrange for the money right away, so he writes this letter of credit to the other party to ensure that he is soon going to pay the money he owes. This is the same letter that serves as a guarantee to the seller and if he doesn’t get his money, he can sue the purchases in the court on the basis of this letter.  This letter also serves as evidence that all the delivered services or products meet the standards according to the agreement and the seller or vendor has done his part.

There are various types of letters of credit but some of them are more important. When a company sends a letter of credit, it could be of one kind of more than one kind at once. This all depends upon the present situation of that time. The common types of letters of credit are:

  • Unconfirmed
  • Confirmed
  • Irrevocable
  • Revocable
  • Transferable
  • Stand-by
  • Back-to-back
  • Revolving

The main advantage of the letter of credit is that it ensures the seller that he is going to get his money without any risk of loses. When the seller and purchaser are in different countries and the same laws can’t apply on both of them at the same time, this letter is the most powerful document in the business world that can be challenged in almost every country and court in the world. In case a bank or number of banks is also involved in the deal or agreement, the risk of non-payment is transferred to the bank(s). Although when you involve a bank in the contract, it may charge you some extra money for issuing the letter of credit. On the buyer side, this letter is also very important as with issuing this letter, the buyer ensures that he won’t be asked for the payment before time as per the contract.

General guidelines to write a letter of credit:

  • Before you write the letter, make sure that you are addressing to the right person and sending it to the correct department. All the companies have websites from where you can find addresses and in case it’s not possible, call that company and ask about the person and department who deal with the credit issues.
  • At the top of the letter, put your name and contact addresses such as phone number and mail address so that there is no complication to contact you.
  • In the very beginning of the letter, explain the reason of the letter and what type of issues you are having in this process.
  • If you have sent a letter before and this is your second or third letter, provide the reference number of the previous letter(s).
  • Attach the credit report with your letter which indicates the amount that company owes you. If they have made some previous installments, include that information too.
  • If you have an account in that company or some reference number to the mutual agreement, provide it too. This makes it easy for that company to immediately recognize you and collect all the information and documents of your deals and agreements.
  • Finish the letter with a hope that the company will soon respond to your request and will make the payment as soon as possible. Put your full name and signature at the end and close the letter.

Here is preview of this Sample Letter of Credit created using MS Word,

Letter of Credit (LC)

Here is download link for this Letter of Credit,

Download Letter of Credit

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