MagNet is a U.S. company based in Utah. It is negotiating to sell $4 million worth of computer goods to a French company, Legran. MagNet's attorney suggests that payment be by a letter of credit. What is a letter of credit and why does MagNet's attorney recommend payment by letter of credit?
A letter of credit is a commercial device used to grant greater assurance of payment in international transactions. The purpose for obtaining a letter of credit is to assure payment for the goods. Legran is the "account party" and MagNet is the "beneficiary" of the letter. Legran will instruct its bank to issue a letter of credit to MagNet. The letter of credit is a promise by the Legran's bank to pay MagNet upon receipt of certain documents. If Legran's bank forwards the letter of credit to MagNet's bank, MagNet's bank can confirm the letter of credit, thus providing MagNet with even greater assurance of payment.
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