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A letter of credit is a document a buyer requests from their bank stating that payment to a seller will be made, in order to reassure the seller that they will not be left empty-handed. The seller receives this letter of credit from the buyer's bank. A letter of credit authorizes the seller to draw drafts up to a stipulated amount - thus the bank ends up paying instead of the buyer. A letter of credit often comes with very specific instructions in order for the seller to obtain the payment(s). To make good on the letter of credit, the seller must often present the necessary documentation within a specified time frame confirming the delivery of goods. A letter of credit is often used in international business, since the letter of credit essentially helps eliminate risk. |
