Letters of Credit

What is a Letter of Credit (LC)?

Letters of credit, also known as financial guarantees, are a financial facility issued by the buyer's or importer's bank, which effectively serves 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 essential trade finance solutions that facilitate trade across the globe and build trust between exporters and importers.

LCs operate independently of the underlying transaction; banks typically require the applicant (usually the buyer) to provide collateral before issuing a Letter of Credit. This means that banks focus solely on the documents presented, rather than on the goods, services, or transactions connected to those documents.

How does Letter of Credit (LC) work?

Letters of Credit (LCs) are utilised to guarantee payments and enhance trade, particularly in international transactions. When a seller seeks assurance of payment, the buyer may present a letter of credit. This acts as a commitment from the buyer’s bank that payment will be made on time, even if the buyer is unable to fulfill the payment obligation themselves.