What is a Sight Letter Of Credit
A sight letter of credit is a document that verifies the payment of goods or services, payable once it is presented along with the necessary documents. An organization offering a sight letter of credit commits itself to paying the agreed amount of funds provided the provisions of the letter of credit are met.
For example, a business owner may present a bill of exchange to a lender along with a sight letter of credit and walk away with the necessary funds right then. A sight letter of credit is thus more on-demand than some other types of letters of credit.
BREAKING DOWN Sight Letter Of Credit
A letter of credit is a document provided by a third party that verifies the payment for the associated goods or services will be paid. The document lists the precise conditions under which the funds can be released. This can include specific documentation requirements as well as an acceptable time frame for delivery.
The letter of credit is separate from other contracts negotiated as part of the transaction, though it must be agreed upon by all parties. It can be used for national or international business. It is more common in international sales transactions, as it shifts risk away from the buyer and seller by having a bank centrally involved in the transaction.
A sight level of credit is payable to the beneficiary once the required documents have been presented to the financial institution backing the letter. The financial institution is allowed a reasonable amount of time to process the payment, which is generally limited to five business days. The required documents can include items like proof of shipment or delivery of the items purchased by the buyer.
Sight vs. Time Letters of Credit
A sight letter of credit is payable as soon as it, and all required documents, are successfully provided to the appropriate financial institution. A time letter of credit also has document requirements, but it includes a minimum amount of time that must lapse prior to payment being issued.
Understanding the Parties Involved
A sight letter of credit involves three parties: the buyer, the issuing bank and the seller. The buyer, also known as the applicant, is the person the payment will be on behalf of. The issuing bank, representing the buyer, will be the source of the payment being requested. The seller is the person or entity who will receive the funds listed on the letter of credit once the requested goods or services have been delivered.