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Letter of Credit Discounting: Understanding the Process and Benefits
A letter of credit (LOC) is a document issued by a financial institution that guarantees payment to a seller for goods or services provided to a buyer.
LOCs are often used in international trade to reduce the risk of non-payment for both parties involved in the transaction.
However, for the seller, the wait for payment can be lengthy and impact their cash flow. This is where letter of credit discounting comes into play.
What is Letter of Credit Discounting?
Letter of credit discounting is a financial process where a seller can receive a portion of the payment guaranteed by an LOC before the actual payment due date.
This allows the seller to receive cash sooner and improve their cash flow, while the buyer still has the assurance of payment through the LOC.
The seller can receive the discounted amount by selling the LOC to a financial institution, known as a discounting bank.
How Does Letter of Credit Discounting Work?
- The seller and buyer agree on the terms of the transaction, including the use of an LOC as a form of payment.
- The seller applies for letter of credit…
