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What is LC (Letter of Credit) ?
In international trade, trust between buyers and sellers is not always guaranteed—especially when they are in different countries, operating under different laws and currencies. To reduce risk, businesses often use a Letter of Credit (LC), one of the most secure and widely accepted instruments in global commerce.
A Letter of Credit is a financial guarantee issued by a bank on behalf of the buyer (importer), promising to pay the seller (exporter) once specific conditions are met and required documents are submitted within the agreed time.
Purpose of an LC
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For Exporters (Sellers): Payment security and reduced risk of buyer default.
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For Importers (Buyers): Assurance that payment will only be made if shipment and documents comply.
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For Banks: Act as a neutral financial bridge, protecting both parties and facilitating trust.
Key Parties Involved in LC Transactions
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Applicant: Buyer/Importer who requests the LC.
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Beneficiary: Seller/Exporter who receives payment under the LC.
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Issuing Bank: Buyer’s bank that issues the LC.
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Advising Bank: Seller’s bank that authenticates and communicates the LC.
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Confirming Bank (Optional): Provides an additional guarantee, especially in high-risk countries.
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Negotiating Bank (Optional): Verifies documents and handles payment to the seller.
📚 Types of Letters of Credit You Must Know
1️⃣ Revocable LC – Can be modified or cancelled anytime by the buyer; rarely used today.
2️⃣ Irrevocable LC – The most common type; changes require consent from all parties.
3️⃣ Confirmed LC – Backed by a second bank, ensuring extra security.
4️⃣ Unconfirmed LC – Only guaranteed by the issuing bank.
5️⃣ Sight LC – Payment is made immediately after documents are approved.
6️⃣ Usance (Deferred) LC – Payment is made after a set credit period (30/60/90 days).
7️⃣ Transferable LC – Allows the beneficiary to transfer payment rights to another supplier.
8️⃣ Back-to-Back LC – Used by intermediaries or traders sourcing goods from another supplier.
9️⃣ Standby LC (SBLC) – Functions as a secondary guarantee if the buyer defaults.
🔟 Red Clause LC – Provides advance payment to the seller before shipment.
1️⃣1️⃣ Green Clause LC – Like Red Clause, but also covers pre-shipment storage or insurance costs.
Typical Documents Required Under LC
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Commercial Invoice
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Packing List
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Bill of Lading (or Airway Bill)
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Certificate of Origin
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Insurance Certificate
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Inspection Certificate (where required)
Benefits of Using LC in Textile Apparel Trade
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Trust Building → Protects both importer & exporter in cross-border deals.
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Timely Payments → Sellers receive guaranteed payments on schedule.
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Risk Reduction → Safeguards against default and non-performance.
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Creditworthiness → Exporters can use LC as collateral for bank financing.
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Global Acceptance → Recognized worldwide as a secure trade finance tool.
LC in the Textile Industry
In garment exports, fabric trade, and apparel sourcing, LCs are critical. Exporters rely on them to avoid payment delays, while importers use them to ensure quality and compliance. Whether it’s bulk fabric shipments from Surat, garment consignments from Tiruppur, or home textiles for U.S. retailers, LCs provide the trust backbone for multimillion-dollar deals.
For more textile trade knowledge and financial tools explained simply
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