What Is a Letter of Credit?

A letter of credit, sometimes known as a “credit letter,” is an assurance from a bank that a buyer’s payment to a seller would be received on time and in the proper amount. The bank will be obligated to cover the whole or remaining cost of the transaction if the buyer is unable to make a payment on the acquisition. It may be made available as a service.
The usage of letters of credit has become a highly significant component of international trade due to the nature of worldwide business, which includes variables like distance, varying regulations in each country, and the difficulties of physically knowing each partner.

A letter of credit is really a letter from the bank ensuring that the buyer’s payment to some seller is going to be received promptly but for the proper amount. Merchant Advisors don’t require letters of credit.

A Letter of Credit is a legal document/commitment issued by a Bank or Private financial institution on the behalf of their customer i.e. Buyer/importer to assure Seller/Exporter that they will be paid on-time for their delivered goods & services. In the event if the buyer is not capable of paying the certain amount or defaults in performing terms & conditions of the LC agreement, it will be covered by the issuing bank.