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A letter of credit is a document issued by the bank guaranteeing the seller of a commodity that he or she will receive the payment on condition that given stipulated delivery conditions are fulfilled. The process involves the seller placing an offer and the buyer bidding on the offer. when they reach an agreement, the seller consults the bank in his home country that issue the document for payment once the consignment is delivered. In the same manner, the bank ensures that it has made an agreement with the buyer, receives money from him and issues the document promising to pay once the goods are delivered. Once they are delivered in good condition, the bank transfers cash to the sellers account of which the buyer consents to.
This system has developed due to the need to save time, reduce the risk of defaulted payment and as well smoothen the trading process where the buyer does not know the seller and vice versa.
The advantages of the system is that it is secure. If goods are delivered in good condition and the buyer is satisfied, the seller gets paid. Additionally, it is faster, more convenient and easier to use.
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Sep 24th, 2015
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