What is Letter of credit?

A letter of credit (LC) is a financial document issued by a bank on behalf of a buyer, guaranteeing payment to a seller for goods or services, provided the seller meets certain conditions outlined in the letter. It is commonly used in international trade to reduce the risk of non-payment and ensure that both parties in a transaction fulfill their obligations. In Switzerland, letters of credit are regulated by international standards such as the UCP 600 (Uniform Customs and Practice for Documentary Credits), which sets the guidelines for their use.

Key Features of a Letter of Credit

  • Payment Guarantee: A letter of credit ensures that the seller will receive payment as long as the terms and conditions specified in the LC are met. This guarantees security for the seller, as payment is assured by the bank, regardless of the buyer’s financial situation.
  • Conditions for Payment: The buyer must meet certain requirements set by the letter of credit, such as providing specific documentation (e.g., bills of lading, invoices, certificates of origin). Once the seller fulfills these conditions, the bank releases the payment.
  • Types of Letters of Credit: There are different types of LCs, including revocable, irrevocable, confirmed, and unconfirmed, each offering varying levels of security and flexibility for both parties involved in the transaction.

Legal and Regulatory Considerations in Switzerland

In Switzerland, letters of credit are widely used in international trade and are governed by both national and international regulations. Swiss banks and financial institutions follow the UCP 600 standards set by the International Chamber of Commerce (ICC) and ensure that the LC process aligns with Swiss financial laws.

  • Issuing and Confirming Banks: A letter of credit may be issued by the buyer’s bank (issuing bank) and, in some cases, confirmed by another bank (confirming bank) to add additional security for the seller. This is particularly useful in international trade where the seller may be unfamiliar with the buyer’s bank.
  • Compliance with Regulations: Both the buyer and the seller must comply with the terms of the letter of credit to ensure that the payment is made. Non-compliance or discrepancies in documentation can result in delays or the refusal of payment. Swiss banks assist in ensuring that all documentation is in order and in line with international trade practices.

A letter of credit is an essential tool in mitigating risk and facilitating trust in international trade, especially in Switzerland’s competitive and well-regulated financial environment.