Understanding and Using Letters of Credit
Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism.Commercial Letter of Credit.
Commercial letters of credit are an effective tool in facilitating payment in international trade. Their use continues to increase as global economies evolve and developing countries continue to increase their market share of the manufacturing process.Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. These general provisions and definitions of the International Chamber of Commerce are binding on all parties once entered into.
