Letter of Credit (LC)

Letter of Credit (L/C):

L/C means letter of credit. The technical term for letter of credit is ‘Documentary credit’. It is a common word for merchandisers in apparel merchandising. L/C is a payment term generally used for international sales transactions. It should be mentioned that L/C deals only in documents but not goods. L/C works in favor of both of the Buyer and seller. The bank that issues the L/C is termed as Issued bank or Buyer’s bank. The bank which advice the L/C to the seller is called Advising bank or Seller’s bank.

L/C for Garments

There are mainly two types L/C. these are-

1. Master L/C,
2. Back to back L/C.

Both of those are described in the below:

1. Master L/C:

When a L/C is opened to import goods directly from the exporter is called master L/C. This L/C is issued by the buyer (Buyer’s bank) to manufacturer. Master LC has higher financial value than back to back L/C.

2. Back to Back L/C:

When a L/C is prepared by the manufacturer to collect raw materials for production from the suppliers is called Back to Back L/C. Back to Back L/C has 70-80% financial value of master LCs.

Difference between Master L/C and Back to Back L/C:

SL No.	Subject	Master L/C	Back to Back L/C
01	Definition	This type of L/C is prepared by the buyer to import goods from the manufacturer.	This type of L/C is prepared by the manufacturer to collect raw materials from raw materials supplier for the production.
02	Issued Bank	Issued by the buyer’s bank.	Issued by the manufacturer’s bank.
03	Types of L/C	It is a basic L/C.	It depends on master L/C
04	Purpose	To import goods from the manufacturer.	To collect raw materials from the Raw material suppliers.
05	Financial Value	It has higher financial value than Back to Back L/C.	It has lower financial value than master L/C.