A Letter of Credit (LC or L/C) is a banking document commonly issued at the request of the buyer, promising the seller of payment if certain conditions are met. These conditions are usually related to the provision of specific documents in line with the terms in the letter. This instrument is often employed in international trade to mitigate risk between the seller and the buyer, particularly due to the substantial time gap between the completion of the deal and the actual receipt of goods.
In cases where the buyer cannot pay, the bank, or a financing company involved in trade financing, takes over the responsibility of paying the amount, thus ensuring the seller’s security. The bank or financing company will then recover the funds from the buyer according to the repayment terms. Letters of credit can have different forms and are subject to different conditions to serve various purposes.