Letter of Credit
A bank guarantee ensuring payment for goods or services if specified conditions are met, commonly used in international trade to reduce transaction risk.
Letter of Credit
A financial instrument issued by a bank guaranteeing that a buyer’s payment will be received on time and for the correct amount, used frequently in international trade to reduce the risk of non-payment.
For instance, an importer might arrange for a $50,000 letter of credit from its bank when ordering goods from an overseas supplier, providing the supplier assurance of payment upon proper shipment and documentation.
Letters of credit facilitate international commerce by mitigating payment risks between unfamiliar parties. They create contingent obligations for the buyer that may require disclosure in financial statement notes. The process involves application, issuance, document verification, and payment, with banks serving as intermediaries throughout the transaction.