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.
There are mainly two types L/C. these are-
- Master L/C,
- 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.
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Subject
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Master L/C
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Back to Back L/C
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01
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Definition
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This type of L/C is prepared by the buyer to import goods from the manufacturer.
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This type of L/C is prepared by the manufacturer to collect raw materials from raw materials supplier for the production.
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02
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Issued Bank
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Issued by the buyer’s bank.
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Issued by the manufacturer’s bank.
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03
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Types of L/C
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It is a basic L/C.
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It depends on master L/C
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04
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Purpose
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To import goods from the manufacturer.
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To collect raw materials from the Raw material suppliers.
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05
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Financial Value
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It has higher financial value than Back to Back L/C.
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It has lower financial value than master L/C.
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