Letter Of Credit (Lc/Loc) Definition

A letter of credit (L/C), also known as a documentary credit or bankers’ commercial credit, is a payment mechanism used in international trade to provide an assurance to the seller that payment will be received for the goods shipped.

A letter of credit is issued by a financial institution, typically a bank, on behalf of the buyer. The buyer’s bank pays the seller as long as the documents required by the letter of credit are presented.

If you’re new to global trade financing, terms like ‘letter of credit’ (LC) or ‘documentary credit’ may sound foreign – quite literally. An LC is one type of financing your business can use when importing or exporting goods. In short, an LC is like a guarantee from your buyer’s bank to pay your company for goods shipped – provided that you meet all the conditions set out in the LC.

Why Use an LC?

There are several reasons why companies choose to use an LC instead of other methods like open account trading:

To mitigate risk: An LC protects both the importer and exporter from default risk – meaning, if either party doesn’t hold up their end of the bargain, they can invoke the terms of the LC to receive reimbursement. This makes letters of credit an attractive option for first-time transactions between two companies that don’t have a history of working together.

To secure financing: Since banks are usually involved in issuing letters of credit, they can