In trade — particularly cross-border — a buyer and seller who do not know each other need assurance of payment and delivery. A Letter of Credit (LC) is a bank's promise to pay the seller once agreed conditions are met.
This guide explains how an LC works.
What is Letter of Credit (LC)?
An LC is issued by the buyer's bank, guaranteeing payment to the seller upon presentation of specified documents (like shipping documents) that prove the goods were dispatched as agreed.
It shifts the credit risk from the buyer to the buyer's bank, giving the seller confidence to ship.
Frequently asked questions
Who issues a letter of credit?
The buyer's (importer's) bank issues the LC in favour of the seller (exporter).
When is payment made under an LC?
When the seller presents the documents required by the LC, proving the terms have been met.