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. It is a commitment on the part of buyer issued by bank or any financial institution authorizing the seller to obtain payment within a certain timeframe. Letters of credit make it possible to do business worldwide.
Importers and exporters use letters of credit to protect themselves from having losses in trade and there may be barriers in communication across thousands of miles and different time zones A bank promises to pay on behalf of a customer, but bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to deposit (or already have) enough money to cover the letter of credit For parties are involved in letter of credit: • The buyer (the applicant) • The issuing bank • The advising bank (may also be the correspondent, nominated, confirming bank) • The seller (the beneficiary) The use of the letters of credit as a tool to reduce risk has grown substantially over the past decade. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade