What is LC (Letter of Credit)?
“LC” typically stands for “Letter of Credit.” A Letter of Credit is a document issued by a bank that guarantees payment to a seller for goods or services, provided that certain conditions are met. Essentially, the bank acts as an intermediary between the buyer and the seller, ensuring that the seller will receive payment if they fulfill the terms of the Letter of Credit.
LC discounting, also known as “LC financing,” is a process in which a seller obtains cash from a bank or financial institution by selling their Letter of Credit at a discount. This allows the seller to receive payment for their goods or services more quickly than they would if they had to wait for the buyer to pay the bank directly.
How to understand it in practical situation?
In a practical situation, LC discounting may be used in international trade when the seller needs access to cash before the buyer has paid for the goods or services. The seller can sell the Letter of Credit to a bank or financial institution at a discount, and receive cash immediately. The bank then assumes the risk that the buyer will not pay, and takes on the responsibility of collecting payment from the buyer when it is due.
To do LC discounting in a practical situation, the seller would typically need to find a bank or financial institution that is willing to purchase their Letter of Credit at a discount. The discount rate would depend on factors such as the creditworthiness of the buyer and the terms of the Letter of Credit. The bank or financial institution would then provide the seller with the cash they need and assume the risk of collecting payment from the buyer at a later date.