A Letter of Credit is a document that is issued by a bank where they guarantee that the buyer is able to make a payment. The purpose of the letter is to confirm the payment, and if the buyer is unable to make a payment for some reason, then the bank guarantees to make it instead of them. A printable Letter of Credit template can be found through the link below.
In this relationship, the bank is a disinterested party that releases payment only after certain conditions are met. A Credit Letter is mostly used for businesses that participate in international trade since there are a lot of factors that affect the situation. Those factors can include the distance between the involved parties, not knowing each other adequately, and the different laws that apply in each country.
In some cases, the letter is not enough, and to improve their chances of securing payment the buyer can apply for a confirmed Letter of Credit. This document is a type of Letter of Credit where payment is guaranteed by two banks. If the buyer is not able to pay and the first bank fails to transfer the funds, the second bank is supposed to do it.
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