Letter of Credit

What is Letter of Credit?

It is a payment method where a bank (issuing bank) acting in line with the instructions of a buyer (Applicant) makes a payment commitment in favor of the beneficiary up to a specific amount against the proof of the fulfilment of the conditions specified in the letter of credit with the submission of documents specified in the letter of credit. The payment under the letter of credit is made as specified in the letter of credit on condition that the documents mentioned in the letter of credit are submitted within the specified periods of time.

The seller, in favor of whom the documentary credit is issued (beneficiary), receives a payment guarantee from the issuing bank against the fulfilment of the conditions and carries out the shipment of the goods subject to the letter of credit and then submits the documents requested under the letter of credit to the issuing bank through its bank. If the submission is made on time and in accordance with the conditions of the letter of credit, the beneficiary is entitled to receive payment under the letter of credit. If the Seller fails to act in accordance with the conditions of the letter of credit, the bank (issuing bank) and the buyer shall have no payment obligation. Therefore, the letter of credit is a method of payment which protects both the buyer and the seller.

Features

• It protects both the buyer and the seller.
• In accordance with the payment type, it can be issued as Letter of Credit At Sight, Deferred Payment, Mixed Payment, Acceptance Credit, Negotiation Credit.
• In accordance with its features, it can be issued as Transferable, Revolving, Red Clause and Green Clause (Evergreen).

Parties

Applicant: The party which applies to its bank to initiate the letter of credit process in order to buy the goods or service subject to the letter of credit.

Issuing Bank: The bank which issues the letter of credit in line with the instructions of the Applicant and makes payment commitment in favor of the beneficiary under the letter of credit.

Beneficiary: The seller in favor of whom the documentary credit is issued.

Advising Bank: It is the bank that advises the issued letter of credit to the beneficiary. *

Confirming Bank: It is the bank which, in line with the request of the beneficiary and authorization of the issuing bank, makes payment commitment in favor of the beneficiary under the letter of credit in addition to the payment obligation of the issuing bank.

Confirmed Letter of Credit

• The letters of credit, which contain the payment commitment of a second party accepted by the importer in addition to the payment commitment of the issuing bank, are called as Confirmed Letter of Credit.
• The Seller (Beneficiary), who does not wish to undertake the risk of the issuing bank and its country, may request the addition of a confirmation to the letter of credit by a bank operating it its own country. Therefore, the Seller (Beneficiary) is protected from the risk of issuing bank and its country with the confirmation method.