How to open LC?

Letter of Credit  L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :

1. Is to make a payment to or to the order  third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.

A letter of credit (L/C) is opened at the request and on the instructions of the applicant. The applicant files an L/C application with his/her bank. The application forms contain all the necessary information required of an L/C to the beneficiary.

The L/C application in some countries must be accompanied by a pro forma invoice (the sales confirmation) and the importer may be required to deposit 20% to 100% of the invoice value in local or foreign currency, which is a form of non-tariff barrier. The deposits, plus other fees and charges, can be expensive and may discourage importers from using the L/C in payment.