GLOSSARY
Letter of Credit
A bank-issued promise to pay the seller on presentation of compliant documents. The most formal trade-finance instrument, governed by ICC's UCP 600.
A letter of credit (LC) is a document issued by a buyer's bank that guarantees payment to the seller, provided the seller presents documents that comply exactly with the LC's terms. It substitutes the bank's creditworthiness for the buyer's.
Why it matters
LCs dominate cross-border trade where buyer and seller don't yet trust each other, where the ticket is large enough to justify the 80-200 basis point cost, or where regulatory or customs regimes require documentary evidence of payment.
Related terms
- Documentary Collection (DP/DA)
- UCP 600
- Standby Letter of Credit
- Confirmation
- Discrepancy
Further reading
- What is a letter of credit? UCP 600 for SME exporters
- Factoring vs letter of credit