askvity

What is pi in LC?

Published in Letter of Credit 3 mins read

Pi in LC stands for Proforma Invoice within the context of Letter of Credit (LC) transactions.

Proforma Invoice Explained

A proforma invoice (PI) is essentially a preliminary bill of sale provided by a seller to a buyer. It outlines the details of a proposed transaction and contains information such as:

  • Description of goods/services: A clear and detailed explanation of what is being sold.
  • Quantity: The amount of each item being sold.
  • Price per unit: The cost of each individual item.
  • Total cost: The overall price of the goods/services.
  • Shipping details: Information about how the goods will be transported (e.g., mode of transport, estimated shipping date).
  • Payment terms: How and when the buyer is expected to pay.
  • Validity period: The period for which the quoted price is valid.

How a Proforma Invoice is Used in a Letter of Credit Transaction

The proforma invoice plays a crucial role in setting up a Letter of Credit. Here's how:

  1. Initiating the LC: The buyer uses the proforma invoice received from the seller to apply for a Letter of Credit from their bank (the issuing bank). The PI provides the necessary details for the bank to understand the transaction.

  2. LC Terms and Conditions: The information in the proforma invoice forms the basis for the terms and conditions of the Letter of Credit. The issuing bank will incorporate details like the description of goods, quantity, price, and payment terms into the LC document.

  3. Documentary Requirements: The LC will specify the documents required for the seller to get paid. These documents often include a commercial invoice (which is based on the proforma invoice), packing list, bill of lading, and other documents required by the LC terms.

  4. Seller's Assurance: By providing a proforma invoice, the seller is committing to deliver the goods or services as described, at the agreed-upon price, within the specified timeframe.

In summary, the proforma invoice acts as the foundation for a Letter of Credit transaction, providing the necessary information for the buyer to secure the LC and ensuring that both parties are clear on the terms of the agreement.