A letter of credit reduces an importer's ability to borrow funds for other purposes because:
A) the importer has to request for it.
B) it is a financial liability against the importer.
C) the importer has to pay for the merchandise even before receiving the documents.
D) the importer has to pay even if the conditions stated in the letter are not satisfied.
E) it does not give the importer any extra time to resell the merchandise before requiring payment.

Question

Quizplus · Accepted Answer

A letter of credit is a commitment from a bank to pay the seller, which means the bank is taking on a financial liability against the importer. This reduces the importer's ability to borrow funds for other purposes since lenders take into account any outstanding liabilities when assessing creditworthiness.

A Letter of Credit Reduces an Importer's Ability to Borrow