The letter of credit or LC for short is like a bank guarantee that is used in the international trade. Indeed the international freight traffic has not the same level of security as the national freight traffic. How does this process work?
It's a document that proves a payment commitment. It allows to certify the successful implementation of the seller and the buyer. The bank is obliged, through this document, to pay the seller for the buyer.
The buyer allows the bank to give the purchase's price to the seller. If the seller gives the settled documents, the debt obligation is honored. Thus, the seller sends the goods only when a bank guarantees the payment and the buyers only pay when the merchandise is sent.
The revocable letter of credit can be changed or canceled by the issuing bank without informing the beneficiary. This form of letter of credit doesn't give a sufficient guarantee and is only used between commercial partners that trust each other.
The irrevocable letter of credit needs the beneficiary's and the bank's agreement. If the beneficiary respects the conditions of the letter of credit, it will pay off with benefits.
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