A letter of credit is a financial document issued by a bank or financial institution that guarantees a seller will receive a buyer’s payment on time and for the correct amount. It is commonly used in international trade to protect both buyers and sellers, especially when they are separated by distance, differing laws, and different trading customs.
The letter of credit serves as a payment method to ensure that the seller is paid upon presenting the specified documents. There are various types of letters of credit, and the process involves an impartial third party, typically a bank, to provide a guarantee of payment. The letter of credit can be general or special, with specific conditions regarding the payment that need to be followed.