A letter of credit is a financial agreement between a bank, its customer, and the beneficiary. The letter of credit, which is usually issued by an importer's bank, ensures that the beneficiary will be paid whenever the letter of credit's terms are met.
LG is commonly used in real estate contracts, infrastructure projects, constructions, project management, and other areas where LC is employed. The issuing bank issues a bank guarantee to the recipient, ensuring payment in the case of a delay or other defect.
The bank pays the sum to the beneficiary once the duty on the production of documentation on contract fulfilment is met. A bank guarantee, on the other hand, pays the beneficiary if the BG contract's obligations are not met.
Small firms use letters of credit and letters of guarantee, sometimes known as bank guarantees, to generate cash flow. Credit lines such as LCs and LGs guarantee payments for products and services.
A letter of credit, sometimes known as a "credit letter," is an assurance from a bank that a buyer's payment to a seller would be received on time and in the exact amount. The bank will be forced to cover the full or remaining price of the purchase if the buyer is unable to make a payment on the transaction.
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