Letter of Credit

A Letter of Credit (LOC) is a document issued by a bank guaranteeing payment to a seller on behalf of a buyer, provided the seller meets specified terms and conditions. It's primarily used in international trade to mitigate risks for both parties. The bank essentially substitutes its creditworthiness for that of the buyer. Common types include sight letters of credit (payment upon presentation of documents), time or usance letters of credit (payment at a future date), and standby letters of credit (backup payment mechanism). The LOC specifies the documents required (such as bills of lading, invoices, inspection certificates), payment amount, and timeline. This instrument facilitates trade between parties who may not have established business relationships, protecting the seller against non-payment and the buyer against non-delivery.