Loan against Letter of Credit LC

A letter of credit (LC) is a form of financing in which a buyer or borrower can receive money from a bank as collateral for a documentary letter of credit. This mechanism is particularly common in international trade, where it guarantees the seller payment for the goods, and the buyer safe delivery.

In practice, it looks like this: the importer applies to his bank with a request to open a letter of credit in favor of the exporter. After the exporter fulfills the terms of the contract (for example, ships the goods and provides the relevant documents), the bank makes the payment. If the importer does not have sufficient funds immediately, the bank can provide credit under this letter of credit - that is, finance the transaction from bank funds. In some cases, monetization of the letter of credit is also practiced: the recipient (seller) can use the letter of credit as collateral to obtain financing until the actual payment.

Such lending is possible only if the letter of credit itself has clearly defined conditions, a reliable issuer (a first-class bank) and properly structured documentation. Covered (revocable) or irrevocable letters of credit with a clear payment guarantee are most often used. Banks assess risks based on the country of the buyer, the type of goods, the history of cooperation and the reliability of all parties.

A loan against letter of credit lc is an effective tool that allows a business to carry out large trade transactions without immediately withdrawing working capital. It provides financial flexibility, increases trust between the parties and minimizes risks in foreign economic activity.