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LC discounting is a credit facility extended by banks. In this process, the financial institution purchases bills or documents from exporters and provides a loan after discounting the bill amount, i.e., reducing the applicable charges.
Letter Of Credit
Factors like the relation between a buyer and a seller, economic conditions, nature of transactions, national and international trade, etc. often decide the fate of trading. If there is discord among any of these factors, traders are likely to incur a loss unless they have financial security like a Letter of Credit or LC discounting to fall back on.
Letter of Credit discounting is a primary method of financing in international trade and is also known as a documentary credit. Fundamentally, it is a guarantee provided by a financial institution to pay sellers on behalf of buyers in case of default on their part. Letter of Credit discounting serves as financial security for businesses involved in either export or import or both.
LC discounting is considered to be a typical funding option as financial institutions follow a mandatory verification process to confirm the authenticity of both the parties. Also, the chance of manipulating the discounting rate is minimal as only the prevailing rates apply to a Letter of Credit.