Letter of Credit is a financial instrument issued by a bank that guarantees payment to a seller on behalf of a buyer, provided specified conditions are met.
How It Works:
- Buyer requests the bank to issue a Letter of Credit.
- The bank guarantees payment to the seller.
- The seller ships goods as per agreed terms.
- Required documents are submitted to the bank.
- Payment is released after verification.
Benefits:
- Reduces payment risk in international trade
- Ensures timely payment to the seller
- Builds trust between buyer and seller
- Facilitates global transactions
Example:
An exporter receives payment through a Letter of Credit after submitting shipping documents to the bank.