Letter of Credit

Letters of Credit include Sight LCs that rely on underlying documentation. The beneficiary must submit certain documents to the specific bank/s in order to get paid. A letter of credit is typically the document that governs the requirements for payment. Other documentation must prove that the exporter met the obligation towards the buyer.

Think of a letter of credit as a payment tool. However, it is separate from a sales or purchase agreement. A letter of credit helps to ensure that the party on the other end of a deal obliges and performs specific tasks expected of them.

A bank works as an intermediary guarantor for payment and holds the money until it gets proof that the requirements stated in the letter of credit were satisfied. To set up and draft a documentary LC, the party that will make the payment applies for an LC with a local bank of their choice.

In case you are a seller dealing with overseas buyers, using a letter of credit can help you gain confidence. A properly drafted LC will ensure that you get paid as long as you fulfill the requirements mentioned in the document.

What Is a Sight LC?

A sight letter of credit is a document that guarantees the payment against any services or goods that are being delivered. The amount is payable when the party presents the Sight LC along with other necessary documents.

A company offering a sight letter of credit commits to pay an agreed amount of money to the other party when all of the provisions in the LC are met.

This means a Sight LC provides both the buyer and seller in a transaction some level of protection. Plus, it helps decrease some significant risks involved in conducting business, especially if you are dealing with an international client, either buyer or seller.

Always remember, a Sight LC will involve three parties, i.e., seller, buyer, and the bank issuing letter of credit.

How Sight Letters of Credit Work?

It is relatively simple to understand how a Sight LC works. A third party, typically a bank, provides a letter of credit with a guarantee to pay the agreed payment once the other party renders the desired products or services.

Sight LCs list precise conditions when the bank can release the payment to the service provider. These conditions may include certain documentation requirements along with an acceptable timeline for the delivery of goods.

Proof of shipment is one of the required documents to release the payment. The payment requesting party must present this proof directly to the LC issuing bank.

It is important to remember that an LC is a separate document from other negotiated contracts that are part of a business transaction. However, it still requires both parties to agree upon the LC terms and conditions. As a business, you can use it for either national or international transactions.

However, parties mostly use an LC for international sales transactions. Why? It protects both buyers and sellers and moves the risk away from them, by having an intermediary bank involved in a business transaction from start to finish.

When a Sight Letter of Credit Becomes Due?

A Sight LC becomes payable as soon as the beneficiary provides the required documents to the bank, fulfilling the conditions of the sight letter of credit. However, the bank gets a reasonable time to process the requested payment. This time typically goes up to five business days.

The required documents may include either proof of delivery or proof of shipment for the products purchased by a buyer, as a Sight LC protects both buyer and seller by decreasing any risk involved in international trading. If a seller expresses any concerns about receiving their payment, they can demand a Sight LC as it will become an insurance policy.

One of the most common examples of the effectiveness of sight letters of credit is as follows:

A business owner can present a Sight LC along with a bill of exchange to a lender and walk away with all the necessary funds on the spot. This makes Sight LCs an important document in the trading arena, and it enjoys more popularity than any other type of letter of credit.

Difference between Sight LC and Time LC

A lot of business owners get confused between Sight LC and time letter of credit. Although both require certain documents, and both are common practice within the trading arena, there is a slight difference between the two.

A sight LC becomes due as soon as the beneficiary presents the proof of delivery or proof of shipment, and other ancillary documents. On the other hand, a Time LC needs certain days to pass after submitting a letter of credit, proof of delivery or shipment, and other required documents, before the payment becomes due.