Letters of Credit

What is a Letter of Credit (LC)?

Letters of credit are a financial facility issued by the buyer's/importer's bank that effectively functions as a guarantee to the seller that the buyer in a transaction will pay on time.

Purpose of Letter of Credit (LC)?

Letters of Credit are crucial to facilitate trade all over the world and build trust between exporters and importers.

LCs are independent of the underlying transaction; banks will often ask the applicant (usually the buyer) to provide collateral before issuing a Letter of Credit. This means that banks will only deal with documents – not with goods, services or transactions to which the documents may relate.

How does Letter of Credit (LC) work?

Letters of Credit (LCs) are used to guarantee payments and facilitate trade, especially in international transactions. When a seller wants a guarantee that they will be paid, the buyer may offer a letter of credit. This acts as a commitment on the part of the buyer’s bank that payment will be received on time, even if the buyer is unable to make the payment themselves.