Letter of Credit (L/C)

A Letter of Credit (L/C) is a financial instrument widely used in international trade to facilitate secure transactions between a buyer and a seller. It serves as a guarantee from the buyer's bank to the seller that the agreed-upon payment will be made once the specified conditions outlined in the letter are met.

The L/C provides assurance to both parties by mitigating risks associated with payment and delivery. Typically, the buyer's bank issues the L/C on behalf of the buyer, ensuring that payment will only be made upon the presentation of compliant documents, such as shipping and insurance documents, confirming the shipment of goods as per the terms of the agreement. This mechanism enhances trust and enables smoother cross-border transactions, especially when dealing with unfamiliar parties or when conducting business in regions with varying degrees of financial security.