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Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, & analytics.
An LC at sight is a letter of credit (LC) that is payable immediately (within five lớn ten days) after the seller meets the requirements of the letter of credit. This type of LC is the quickest khung of payment for sellers, who are often exporting to lớn overseas buyers.
Letters of Credit
Letters of credit, including sight letters of credit, rely on documentation. Khổng lồ get paid, the beneficiary (often an exporter or service provider) needs lớn submit documents to lớn specific banks. Those documents typically include the letter of credit itself, as well as additional documents proving that the exporter met their obligations khổng lồ the buyer.
Letters of credit are tools for payment, separate from a purchase or sales agreement. LCs help to ensure that the person on the other side of the giảm giá khuyến mãi performs specific actions. Banks guarantee payment and hold onto the money until it can be proven that those requirements are satisfied. To lớn set up a documentary letter of credit, the party making the payment typically applies for a letter of credit with a local bank.
If you’re selling something (to a buyer overseas, for example), you can gain confidence by using a letter of credit. With a properly designed agreement, you’ll get paid as long as you ship the goods as agreed.
A well-established bank often guarantees payment, so you’re not relying on the credit (or cooperation) of a buyer with whom you are unfamiliar.
If you’re buying something, a letter of credit can help you avoid paying for something that never arrives. Instead of sending money & hoping for the best, your funds are held in escrow until the seller can produce documents proving that they shipped goods lớn you or completed a task. For example, the seller might need lớn provide a bill of lading and other documents.
That said, you can’t eliminate risk using a letter of credit. The seller could potentially ship low-quality goods or even commit fraud và ship a box of rocks. Still, you can reduce your risk with letters of credit. Banks will release funds as long as they receive the documents listed in the letter of credit on time and in good order. The ngân hàng will not ensure that the shipper fulfilled the order exactly as specified in the purchase agreement.
However, you can require an inspection certificate for the letter of credit, allowing somebody to đánh giá the shipment's contents before your payment is released.
What Does "Immediately" Mean?
Although payment with a sight LC is relatively quick, it is not necessarily instant. The seller’s ngân hàng (which might be the negotiating or advising bank) must review the documents you submit và make sure they meet the requirements in the letter of credit. That process may take several business days.
In some cases, the documents must be forwarded khổng lồ another ngân hàng for review. Once each ngân hàng verifies compliance, payment takes place, but don’t expect all of that lớn happen in one day. Finally, although wire transfers are a quick khung of payment, it can take one or two days for funds to kết thúc up in a beneficiary"s trương mục (especially if the transfer comes from overseas).
It's probably reasonable lớn expect about five business days for each ngân hàng to review documentation & another one khổng lồ two business days for the funds khổng lồ arrive at their destination.
Alternative Letters of Credit
To understand how an LC at sight works, it might help to reviews how it doesn’t work. An alternative size of LC is a deferred payment letter of credit or a usance (or “term”) letter of credit.
With those instruments, payment happens at some future point in time, potentially long after the documents have been submitted (perhaps 30, 90, or 180 days after).
Deferred payment gives the buyer more time lớn come up with funds. As a result, that approach can work as a size of seller-financing. The strategy could even attract buyers that otherwise have to lớn pay more quickly (but prefer not to). The buyer also has a chance to sell the imported goods & generate revenue before the payment is due, making it easier khổng lồ fund the payment (or shortening the amount of time that the buyer has to lớn borrow from a bank).
Letters of credit can have a variety of features. For example, irrevocable letters of credit are harder khổng lồ cancel unilaterally. Confirmed letters of credit địa chỉ even more security because a bank that both parties trust can guarantee the payment. That approach provides more confidence than just using an unknown ngân hàng in the buyer’s country.
Why Use a Sight LC?
A letter of credit that pays at sight is beneficial for sellers. Payment arrives more quickly than it would with a deferred payment letter of credit. Exporters spend money khổng lồ produce and ship goods, so getting funds back quickly helps them avoid a cash-flow crunch.
Quick payment is also preferable if you have concerns about the solvency of your buyer or any of the banks involved.
Plus, if you're dealing with a buyer (and bank) in a volatile nation, you might prefer khổng lồ get paid as quickly as possible. Political unrest could lead khổng lồ financial turmoil, resulting in currency changes, asset seizures, and other outcomes that might affect your buyer’s (and any related banks’) ability to pay.
Frequently Asked Questions (FAQs)
What is a letter of credit?
A letter of credit is a letter from a bank that guarantees a seller's payment will be on time và for the right amount. Letters of credit are primarily used in international trade. The bank is required to cover the payment if the buyer is unable khổng lồ make their payment on time or in full. Banks charge a fee to lớn issue a letter of credit.
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What is a standby letter of credit?
A standby letter of credit is lớn guarantee the performance of a contract. The bank guarantees payment to lớn the seller of a set amount of money if the contract isn't fulfilled. The standby letter of credit reduces risk for the seller và provides a financial safety net.