LC full form, What is the LC?

Friends, through this post I will tell you about LC’s full form. Also, how does an LC work? I will give you all the information regarding this also. 

So guys, let’s get started!

LC full form, What is the LC?
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Table of Contents

LC full form

So guys, now! What is the full form of LC? also know

LC full form: “Letter of credit”

What is Letter of Credit?

As soon as we think of Letter of Credit, the first question that comes to our mind is “ What is LC ?” Or what is ” letter of credit meaning “?

Come! First of all, know the meaning of a letter of credit!

We also know the meaning of credit.

LC means: “Borrow, the amount deposited in a bank account, the amount lent by the bank, good reputation, taking credit, trust, trust, give confidence, give credit, recognition, deposit in an account, credit, credit, deposit Wealth, appraise, deposit (money), write off deposit accounts, fame”

What is LC full form?

So guys, now! What is the full form of letter of credit? also know

LC full form: “Letter of credit”

Now! Let’s talk “ What is a letter of credit ?” Or “ letter of credit meaning ” refers to a non-fund-based credit guarantee given by a bank. 

But it is completely different from bank guarantees, and many people get confused about it, so they start thinking of letters of credit and bank guarantees as the same thing.

These two are different financial instruments and their purpose is also different. When we do export-import, we neither trust our customer nor the customer does not trust us.

Along with this, it also happens that you do not have the money right away, to pay for your goods.

Now the exporter will not export the product to you without taking money and you also want the product to come to you when you make the payment.

Buyer and Seller do not trust each other. 

The buyer thinks that “if I paid the money, the seller may not send the goods or may not send it on time.”

This Seller thinks that “If I have sent the goods, then the Buyer may not pay or do not pay on time.” 

A letter of credit is used to deal with such a situation. This is a safe way to import exports.

In this, there is a guarantee by the bank that the buyer will pay the seller and the seller will supply the product to the buyer.

After fulfilling certain criteria, the bank itself makes the payment to the seller. For this, you have to fulfill all the terms and conditions of the letter of credit.

For example: – After shipping the goods, the documents have to be presented to the bank.

In this way, the whole process is completed.

Two-three banks get involved in the letter of credit.

So come on! Let us understand in detail how this whole process happens.

Also Read: NIIT Full Form: What is NIIT and how to do it

How does Letter of Credit work? (letter of credit process chart)

The entire process of letter of credit has been explained through this image also. You can easily understand this process by looking at it!

letter of credit process step by step

Come friends, now let’s understand the process of letter of credit step by step.

LC process Step 1: What are a customer and a seller called?

Buyer / Importer will be called Applicant in this.

Seller / Exporter will be called Beneficiary in this.

The applicant will go to his bank and request letter of credit from him.

This process is also called LC Open. 

This bank will be called Opening Bank / Issuing Bank. 

You should also know about all the types of Letter of Credit – Read to know – All Types of Letter of Credit

Step 2: What is the role of the bank?

  • It also includes a Beneficiary’s bank, which is called Advising Bank. 
  • The Opening Bank / Issuing Bank will send a letter of credit to the advising bank.
  • Beneficiary Bank (Advising Bank) will check its veracity and whether it is correct. For example: – Is the name correct? Is the product name correct? And so on

Step 3: Where will the bank send the LC?

  • Advising Bank will send this letter of credit to Seller/Beneficiary.
  • Now the seller is convinced that the buyer is Genuine because the involvement of the bank takes place in it.

Step 4: When does the seller get the Bill of Lading (BL)?

  • The seller starts feeling his payment safe and he exports the goods. 
  • Because it takes time for the export goods to reach the buyer, meanwhile this process also continues. 
  • The Seller gets the Bill of Lading (BL) when the goods are shipped. 

Step 5: What to do after getting a Bill of Lading?

  • This Bill of Lading is deposited in Seller Nominated Bank / Negotiating Bank. 
  • This Nominated Bank / Negotiating Bank can be different and it can also be an Advising Bank.
  • The nominated Bank / Negotiating Bank checks whether there is any deficiency in the documents. If there is a minor error, he can stop the payment or if it can be rectified then he takes some charge for it.
  • Therefore, you should know what things to keep in mind in the letter of credit. 
  • To know these read – The terms and Conditions in Letter of Credit
  • After all the documents are correct, the Nominated Bank / Negotiating Bank makes the payment to the seller.

Step 6: What does the bank do after all the documents are submitted?

  • The nominated Bank / Negotiating Bank sends all the documents to the Opening Bank / Issuing Bank and demands payment. 
  • Opening Bank / Issuing Bank sends all these documents to the Applicant / Buyer / Importer and takes approval.
  • The applicant/Buyer/Importer checks whether the product he ordered is the same product, and whether all the details are correct or not. 

Step 7: What does the opening bank do after getting the approval?

  •  After getting the approval of the Applicant/Buyer/Importer, the Opening Bank/Issuing Bank demands payment from the applicant.

Step 8: To whom does the importer pay?

  •  Applicant/Buyer/Importer gives his payment to the Opening Bank/Issuing Bank. 

Final Step 9: When does the seller get his payment?

Come on now! Let us also know the letter of credit process final step.

  • The Opening Bank / Issuing Bank gives this payment to the Nominated Bank / Negotiating Bank. 

In this way, the whole transaction gets completed.

The seller gets his payment and the buyer gets his goods.

some other errors 

Sometimes the Advising Bank does not trust the Opening Bank/Issuing Bank for some reason, either it finds that bank small or its credit rating does not suit it.

 Then he tells the Opening Bank / Issuing Bank that you demand a guarantee from a big bank or one that has a good credit rating.

The bank giving this guarantee is called Confirming Bank.

Now if the Opening Bank / Issuing Bank defaults on the letter of credit in any case, then the Confirming bank makes all the payments. 

Does the bank charge anything in return for the issuance of LC?

Now! The question must be coming to your mind does the bank also take Letter of Credit Collateral & Charges?

  • Whenever a bank issues a letter of credit, it does so against the Collateral. Such as Bank deposits, fixed deposits,s, etc.
  • In return for issuing letter of credit, the bank always takes some charges. The charges depend on the type of letter of credit.
  • Because it is used in international trade, guidelines are issued by the International Chamber of Commerce (ICC).

What if there is a mistake in the LC? (Correctness Of LC or amendment in lc)

  • The name of the seller, date, amount, product name, quantity, etc. should be well written.
  • Precise and clear Everything should be written in clear language, and there should not be any spelling mistakes.
  • If there is a spelling mistake in the name of the seller, or the name of the product, the bank does not pay. 
  • The bank will not make the payment even if the shipping is not on time.
  • In this whole process, the bank only checks the documents, if all the details are clear in all the documents, then the payment will be received. Bank has nothing to do with goods and services. That is, the bank does not stop payment if there is a defect in the goods or if the service is bad. 
  • If any goods damage comes or comes less then it is not the responsibility of the bank, the customer and seller will solve it among themselves. 

What are the benefits of letter of credit? (Advantages Of LC)

  • If the buyer defaults, the bank will pay the seller. 
  • The buyer cannot cancel the order, even if it does, the bank will pay you, due to this the production risk is eliminated. 
  • The buyer gets the assurance that he will get the product at the right time. 
  • The seller gets some time to make the payment. 

Letter of credit t types

In the export-import business, we also call a letter of credit lc.

1- Commercial Letter Of Credit

2- Standby Letter of credit

3- Revocable LC

4- Unconfirmed LC

5- Transferable LC

6- Back to Back LC

7- Red Clause LC

8- Green Clause LC

9- Revolving LC

10- Sight LC

11- Deferred Payment LC (or Usance LC)

FAQ: Letter Of Credit

Is letter of credit a safe way to import exports?

Yes, through letter of credit, you get assurance that your payment will not sink.

Can the Buyer stop payment of the letter of credit if my item is found to be broken or defective?

No, the Buyer cannot stop your payment but in every problem, there are some extraordinary rules also.
Secondly, most of the payment close fob is open i.e. free on board the seller is authorized to get his payment then how will the buyer check the goods? 

What is important to know for letter of credit?

Letter of Credit Types, Letter of Credit Process, Letter of Credit Terms & Conditions, and Letter of Credit Payment Terms

What is asked of the buyer by the bank for issuing letter of credit?

The bank also takes care of the security of its payment for issuing the letter of credit, so it will either keep something as collateral, demand an FD, or a bank deposit.

What is the advantage of letter of credit?

Buyer and Seller do not know each other but they both trust the bank. In the letter of credit, there is the involvement of the bank, so the trust of both of them is established in each other. If the buyer does not have money to pay immediately, then this problem is solved through a letter of credit.

What are the things a beginner businessman should keep in mind in the letter of credit?

First of all the type of lc should be irrevocable, lc should be at sight, and payment terms should not be at a stage beyond FOB.

Does the bank issue letter of credit for free?

No, whatever letter of credit you make, the bank will charge you according to some fixed percentage.

If there is any mistake in the letter of credit, can it be rectified by the bank for free?

No, that’s why a lot of care should be taken while making letter of credit because some amount will be charged to you by the bank for every mistake. It also has the advantage that both parties are very careful about the letter of credit.

What is credit called?

“lending, crediting a bank account, money lent by a bank, taking credit, giving credit, recognition, crediting to an account, depositing money, writing off a deposit account”

What is Letter of Credit?

In the export-import business, the customer does not trust the seller and the seller does not trust the customer, a letter of credit is used to create this trust. Through this, the customer’s payment becomes secure, and the seller’s product becomes secure. For this, the bank acts as an intermediary.

How many types of letters of credit are there?

1- Commercial Letter Of Credit
2- Back to Back LC
3- Red Clause LC
4- Sight LC
5- Unconfirmed LC
6-Standby Letter of credit
7- Revocable LC
8- Transferable LC
9- Green Clause LC
10- Revolving LC
11- Deferred Payment LC (or Usance LC)

What is the definition of credit?

Credit: A document in which the lender gives money, goods, or services to the borrower to return the money, goods, or services as promised by him in the future.

Conclusion of lc

In my opinion, knowing this much about lc is not enough. You should also read about LC Types, this will reduce your export-import business risk.

If you liked the post “ What is Letter of Credit ?, How does Letter of Credit work ?, Benefits of LC ”, then subscribe to the blog and also give your questions and suggestions.

Note: Instead of I, the letter has been written as “letter”.


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