Sight Letter of Credit: Definition, How It Works, Example

What Is a Sight Letter of Credit?

A sight letter of credit refers to a document that verifies the payment of goods or services, payable once it is presented along with the necessary documents. An organization that offers a sight letter of credit commits itself to paying the agreed amount of funds provided the provisions of the letter of credit are met.

How Sight Letters of Credit Work

A letter of credit is a document provided by a third party who 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 may include specific documentation requirements as well as an acceptable time frame for delivery. Required documents for payment are generally proof of shipment, which are presented to the issuing bank.

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 letter of credit is payable to the beneficiary once the required documents are 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 letters of credit give each party involved in the transaction some degree of protection and decreases some of the risk involved with business, especially when it comes to international dealings. If the seller has concerns about receiving payment, they may ask for a sight letter of credit as an insurance policy. They are generally considered separate from documents such as purchase or sales agreements.

Example of a Sight Letter of Credit

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.

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 sight letter of credit involves three parties:

• The buyer
• The issuing bank
• The seller

The buyer, also known as the applicant, is the person whom the payment will be on behalf. The issuing bank, which represents the buyer, is the source of the payment being requested. The seller is the person or entity who receives the funds listed on the letter of credit once the requested goods or services are delivered.

A time letter of credit, also called an acceptance credit or a usance letter of credit, also has document requirements. But unlike the sight letter of credit, a certain number of days pass after documents are presented before payment is made.