Letters of Credit - What is a Letter of Credit (Trade Finance Global LC Guide)

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A Letter of Credit is relevant where there is an exporter and an importer; and there needs to be prepayment or a confirmation of payment in order for goods to be shipped.

A letter of credit is an instrument from a bank, which guarantees a buyer's payment to a seller if certain criteria are met.

If the buyer can’t pay up, due to the agreed contract through the Letter of Credit, the bank will cover the remaining price.

Letters of Credit are fundamental components of international trade. They’re governed universally by a set of guidelines called the UCP 600, which are issued by the International Chamber of Commerce.

An LC is a promise written on a legal document that comes from a bank with a promise to pay the holder if the holder fulfills certain obligations. Obligations include payment when the goods are shipped if certain criteria are met.

A Letter of Credit is usually used when the buyer and seller do not know each other well and this is why it is used so frequently in international trade.

Letters of Credit are incredibly specific and a close attention to detail is required. If there is a misspelling in the contract, for example, the name of the goods is incorrectly spelt, there may be non-payment until a new, corrected LC is issued and accepted.