LETTER OF CREDITS or LOCs are common in international trade. The concept of LOCs can be complicated. This ppt makes them easier to understand in the best possible simple language. LEARN, CREATE AND SHARE!!!

1. LETTER OF CREDIT (LOC)
PRESENTED BY - AKSHAY GAUTAM

2. WHAT IS LETTER OF CREDIT?
 A bank acts as an uninterested party
between buyer and seller
 Thus issues letter of credit, a document
from bank guaranteeing that the seller
will receive payment in full as long as
certain delivery conditions have
been met.
IMAGE SOURCE: http://www.pjsymes.com.au

3.  Letters of credit are common in international trade.
 Importers and exporters regularly use letters of credit to protect
themselves.
IMAGE SOURCE: INVESTOPEDIA

4. Why does the seller demand a letter of credit?
 The seller wants more confidence that the buyer will pay.
 Working with an overseas buyer can be risky.
 business troubles or political unrest can delay your payment (or
put your buyer out of business).
 communication can be difficult across thousands of miles and
different time zones.
 a letter of credit spells out the details so that everybody's on the
same page.

5. Where does the money come from?
A bank promises to pay on behalf of a customer, but where does the
money come from?
Some buyers have to deposit enough money to cover the letter of
credit,
And some use a line of credit with the bank (in other words, a loan
is created when the payment is made).

6. HOW DOES LETTER OF CREDIT (LOC) WORKS?

7. IMAGE SOURCE: http://banking.about.c

8. IMAGE SOURCE: http://banking.about.c

9. IMAGE SOURCE: http://banking.about.c

10. IMAGE SOURCE: http://banking.about.c

11. IMAGE SOURCE: http://banking.about.c

12. When does the seller get paid?
 depends on the type of LOC used.
 The seller might get paid within a few days of submitting
documents to a local bank.
 In other cases, the seller will have to wait until certain conditions
are met.
 Sometimes the seller gets paid an “advance” (before shipping
anything) so she can buy resources that will be used to produce
the customer’s goods.

13. TYPES OF LETTER OF CREDITS (LOCs)

14. Commercial Letter of Credit
 standard letter of credit used in international trade, and may also
be referred to as a documentary credit.
Standby Letter of Credit
 provides compensation when something goes wrong.
 only payable when the payee (or “beneficiary”) proves that they
didn’t get what was promised.
 can be used to ensure that you’ll get paid, and they can be used
to ensure that services will be performed satisfactorily.

15. Confirmed (and Unconfirmed) Letters of Credit
 If sellers have any doubts on the bank if it is legitimate, they can use a "confirmed" letter of
credit, which means they can get letters of credit confirmed by banks in their home
country.
 If the issuing bank fails to pay – and the seller is able to meet all of the requirements of the
letter of credit – the confirming bank will have to pay the seller (and try to collect from the
issuing bank later).
SELLERBUYER’S BANK
SELLER’S BANK

16. Back to Back Letters of Credit
 allows intermediaries to connect buyers and sellers.
 Two letters of credit are used: an intermediary gets paid by the
buyer, and a supplier gets paid by the intermediary.
INTERMEDIARY
BUYER SELLER
LOC PAID BY
THE
BUYER
LOC PAID BY
THE
INTERMEDIARY

17. Revolving Letters of Credit
 This type of letter of credit allows businesses to use a single letter of credit
for numerous transactions until the letter expires (typically up to one year).
Sight Letter of Credit
 Payment occurs as soon as the seller submits acceptable documents to the
appropriate bank. If the documents are compliant, payment is made
immediately.
Deferred Payment Letter of Credit
 Payment does not happen immediately after the documents are accepted.
Some agreed-to period of time passes before the seller receives cash.
 a better deal for buyers than for sellers.

18. Red Clause Letter of Credit
The buyer allows for an unsecured loan to be issued as part of the
letter of credit, which is essentially an advance on the rest of the
payment.
The seller can then use the money to buy, manufacture, or ship
goods to the buyer.
Irrevocable Letter of Credit
cannot be changed without authorization from all parties involved.
Almost all letters of credit now are irrevocable, because revocable
letters of credit simply do not provide the security that most
beneficiaries want.

19. THANK YOU 