Letter of Credit

What is Letter of Credit?

A letter of credit is a bank guarantee ensuring that a buyer will make the proper payment to a seller on time and in full. If the buyer fails to pay, the bank will be obligated to pay the full or remaining balance.

Letters of credit are especially important in international trade, where distance, differing legal systems, and limited personal knowledge of trading partners create risks.

Types of Letters of Credit

The different types of letters of credit are:

• Commercial Letter of Credit: Direct payment by the issuing bank to the beneficiary. Unlike a standby letter of credit, which acts as a backup, payment occurs only if the buyer defaults.
• Revolving Letter of Credit: This letter allows the client to make multiple withdrawals within a set time period.
• Travel Letter of Credit: This letter guarantees that issuing banks will honor drafts drawn at designated foreign banks.