A Letter of Credit is a contractual payment undertaking issued by a financial institution on behalf of a buyer of goods for the benefit of a seller, covering the amount specified in the credit, payment of which is conditional on the seller fulfilling the credit’s documentary requirements within a specific timeframe.

A Letter of Credit is one of the oldest and most standard forms of payment for transactions in international trade. Foreign exporters that deal with unfamiliar companies thousands of miles away are naturally uncomfortable in investing money to produce goods and ship them without any assurance of payment. Likewise, importers dealing with foreign suppliers don’t want to pay upfront for the goods that may not correspond to purchase order specifications or may arrive late. Naturally, buyers would prefer to postpone payment until they receive the goods as expected.

This way, for both buyers and sellers in a given transaction, letters of credit represent a reasonable compromise that protects the interest of both sides.