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Simple English definitions for legal terms
negotiation letter of credit
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A quick definition of negotiation letter of credit:
A negotiation letter of credit is a document issued by a bank that promises to pay a third party (the beneficiary) if they meet certain conditions. This is often used in international trade to ensure that the seller gets paid for their goods. The letter of credit can be either revocable (able to be cancelled) or irrevocable (cannot be cancelled without everyone's agreement). There are many different types of letters of credit, including those that require specific documents to be presented and those that can be paid without any additional documents.A more thorough explanation:
A negotiation letter of credit is a type of letter of credit that allows for the transfer of funds from the issuing bank to the beneficiary through a third party, such as a bank or financial institution. This type of letter of credit is governed by Article 5 of the UCC and is often used in international trade transactions.
For example, if a company in the United States wants to purchase goods from a company in China, they may use a negotiation letter of credit to ensure that the payment is made to the Chinese company once the goods have been shipped and received. The Chinese company can present the necessary documents to a bank or financial institution in China, who will then transfer the funds from the issuing bank in the United States to the Chinese company.
Another example of a negotiation letter of credit is when a company wants to secure a loan from a bank. The bank may require a negotiation letter of credit as collateral, which allows the bank to transfer funds to the company if they default on the loan.