Sight LC stands for Sight Letter of Credit, but before we get into the details of the topic, let us find out what letters of credit (“LCs”) are.
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When a Sight Letter of Credit Becomes Due?
A Sight LC becomes payable as soon as the beneficiary provides the required documents to the bank, fulfilling the conditions of the sight letter of credit. However, the bank gets a reasonable time to process the requested payment. This time typically goes up to five business days.
The required documents may include either proof of delivery or proof of shipment for the products purchased by a buyer, as a Sight LC protects both buyer and seller by decreasing any risk involved in international trading. If a seller expresses any concerns about receiving their payment, they can demand a Sight LC as it will become an insurance policy.
One of the most common examples of the effectiveness of sight letters of credit is as follows:
A business owner can present a Sight LC along with a bill of exchange to a lender and walk away with all the necessary funds on the spot. This makes Sight LCs an important document in the trading arena, and it enjoys more popularity than any other type of letter of credit.
Difference between Sight LC and Time LC
A lot of business owners get confused between Sight LC and time letter of credit. Although both require certain documents, and both are common practice within the trading arena, there is a slight difference between the two.
A sight LC becomes due as soon as the beneficiary presents the proof of delivery or proof of shipment, and other ancillary documents. On the other hand, a Time LC needs certain days to pass after submitting a letter of credit, proof of delivery or shipment, and other required documents, before the payment becomes due.
There are several advantages of a sight letter of credit, such as:
Efficient Working Capital Management for the Seller
The sellers get the flexibility to manage their working capital with efficacy. One of the most lucrative advantages of a Sight LC is that the seller can expect to receive the payment against the products quickly and as soon as the shipment of goods is on its way.
Consequently, the seller will not have to experience a cash crunch; and so the seller can efficiently manage his working capital.
Early Payment Benefits
Sight letters of credit come with an interesting benefit for the seller. Typically, a business uses a working capital loan or an overdraft facility to manage their working capital. This scenario becomes inevitable when the seller extends a credit period to a buyer. The credit period may be for a duration of 15 to 90 days. This extension of credit and thus cash gap is not relevant where there is an LC, as a Sight LC guarantees that the seller will get paid earlier.
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Competitive Advantage for the Buyers
As a buyer does not take any credit period from the selling party, they are in a better position to negotiate competitive prices and terms with a seller. This gives a competitive edge to the buyer in the trade market.