A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600).
After a contract is concluded between buyer and seller, buyer's bank supplies a letter of credit to seller.
Seller consigns the goods to a carrier in exchange for a bill of lading.
Seller provides bill of lading to bank in exchange for payment. Seller's bank exchanges bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for payment from buyer.
Buyer provides bill of lading to carrier and takes delivery of goods.
Source : http://en.wikipedia.org/wiki/Letter_of_credit
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