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    LETTER OF CREDIT

    Uploaded by

    kamau2022murigi
    credit accounting

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    LETTER OF CREDIT

    Uploaded by

    kamau2022murigi
    1 views2 pages
    credit accounting

    Copyright

    © © All Rights Reserved

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    DOCX, PDF, TXT or read online from Scribd

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    credit accounting

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1 views2 pages

    LETTER OF CREDIT

    Uploaded by

    kamau2022murigi
    credit accounting

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 2

    LETTER OF CREDIT

    A letter of credit also known as documentary credit or bankers commercial credit, or letter of
    undertaking is a payment mechanism used in international trade to provide an economic
    guarantee from a creditworthy bank to an exporter of goods.

    REQUIREMENTS

    Banks typically requires a pledge of securities or cash as a collateral for issuing a letter of credit.

    CONTENT

    A letter of credit literally is a promise to pay as soon as possible with no revolving debt.

    It is essentially a financial contract between a bank, a banker’s customer and a beneficiary.

    Different types of letters of credit include;

     Standby; used as insurance


     Revocable; creates leverage for the issuer.
     Irrevocable; no amendments or cancellations can occur without the consent of all parties.
     Revolving; can be used as a series of payment.
     Red clause; contains an unsecured loan.

    Main advantage of using a letter of credit is that it can give security to both the seller and the
    buyer.

    Most letters of credit are governed by the rules promulgated by the international chamber of
    commerce known as uniform customs and practice for documentary credits.

    ADVANTAGES AND DISADVANTAGES OF A LETTER OF CREDIT


    ADVANTAGES

    1. Can create security and build mutual trust for buyers and sellers in trade transaction.
    2. Makes it easier to define the specifics of when and how transactions are to be completed
    between involved parties.
    3. They can be personalized with terms that are tailored to the circumstances of each
    transaction.
    4. Can make transfer of funds more efficient and streamlined.
    DISADVATAGES
     Buyers can typically bear the cost of obtaining a letter of credit.
     May not cover every detail of transaction, potentially leaving room for error.
     The terms of letter of credit may not account for unexpected changes in political
    or economic landscape.
     Establishing a letter of credit may be tedious or time consuming for all parties
    involved

    RIGHTS AND DUTIES OF THE PARTIES

    The rights and duties of parties in a contract or legal relationship can vary widely depending on
    the nature of the agreement and the jurisdiction. However, there are some general principles that
    apply in many contexts. Here's an overview:

    RIGHTS OF PARTIES

    1. Right to Performance: Each party has the right to expect the other party to perform their
    obligations as specified in the contract.

    2. Right to Information: Parties are typically entitled to relevant information necessary to fulfill
    their obligations.

    3. Right to Compensation: If one party suffers a loss due to the other party's breach of contract,
    they have the right to seek compensation or damages.

    4. Right to Termination: Under certain conditions, parties may have the right to terminate the
    contract, especially if there is a fundamental breach.

    5. Right to Arbitration or Litigation: Parties have the right to seek resolution through arbitration
    or litigation if disputes arise.

    DUTIES OF PARTIES

    1. Duty to Perform: Each party has the duty to fulfill their obligations as outlined in the contract.

    2. Duty to Act in Good Faith: Parties are generally expected to act in good faith and deal fairly
    with one another.

    3. Duty to Mitigate Damages: If a breach occurs, the non-breaching party has a duty to take
    reasonable steps to mitigate their losses.

    4. Duty to Cooperate: Parties must cooperate with one another to ensure that contractual
    obligations can be met.

    5. Duty to Provide Notice: If a party cannot fulfill their obligations, they typically have a duty to
    provide notice to the other party.

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