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Q.What is a Letter of Credit?
A.A letter of credit, in short, is a document issued by a bank guaranteeing a buyer's ability to pay a specified amount for goods/services on a specified date that is often used by importers and exporters.
A bank or finance company will issue a letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the exporter or seller with the greatest degree of safety when extending credit. It is useful when the importer or buyer is not well known and when exchange restrictions exist or are possible.
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