Letter of credit

A letter of credit is a bank or lender's undertaking to pay a supplier on a buyer's behalf, provided the supplier meets specified conditions, typically presenting agreed shipping and quality documents, giving both parties confidence in a transaction where they may have no prior trading relationship or ability to easily enforce a contract across borders. For an importer, a letter of credit substitutes the financier's creditworthiness for its own with an overseas supplier, often unlocking terms or supplier relationships that would not otherwise be available on an initial or early order. Lenders issuing a letter of credit assess the buyer's ability to reimburse the facility, and often require security or a portion of funds held on account, alongside a clear understanding of the underlying trade transaction and documentation involved. Letters of credit are one of several trade finance instruments, generally used specifically for the payment guarantee they provide rather than as a source of working capital in their own right.

Related

Trade finance · Trade finance · Going concern