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Obtaining a Letter of Credit for International BusinessA letter of credit, or LC, is a way to reduce risk when performing international business transactions that has gained many loyal followers over the years. Because international trade can be a gamble at best, a letter of credit is a binding legal document that works by promising the seller that he will receive payment for the goods or services he sells. In order to receive payment in accordance with the guidelines of a letter of credit, the seller presents the bank with the shipping documents that confirm the products were actually delivered within a certain amount of time. There are a number of different types of letters of credit, and each one serves a different purpose:
- Confirmed Letter of Credit. This is a letter of credit that is first issued by a foreign bank, usually the bank of the buyer. A Confirmed Letter of Credit has been confirmed and guaranteed trustworthy by the seller's domestic bank in case the international bank or buyer fails to pay for the goods or services. This is the type of letter of credit a seller will purchase when handling business overseas. How It All Works While a letter of credit is not necessary for selling goods overseas, it is highly recommended. A letter of credit will help to ensure payment to a seller who is unfamiliar with the country, the buyer's business, or international trade procedures, regardless of instability of the country or failure to pay for the goods on behalf of the buyer. If the seller and buyer have already established a good working relationship and the seller is certain the buyer can be trusted, a letter of credit isn't always necessary.
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