Letter Of Credit

A letter of credit is essentially a financial contract between a bank, a bank's customer and a beneficiary. Generally issued by an importer’s bank, the letter of credit guarantees the beneficiary will be paid once the conditions of the letter of credit have been met.

What is it used for?

  • Letters of credit are used to minimize risk in international trade transactions where the buyer and the seller may not know one another.
  • If you are an importer, using a letter of credit can ensure that your company only pays for goods after the supplier has provided evidence that they have been shipped. It also allows you to conserve your cash flow, since you don’t have to make any advance payments or deposits to the exporter.
  • The letter of credit gives you instant credibility with an exporter by demonstrating your creditworthiness.
  • If you are an exporter, the letter of credit is insurance in case the buyer fails to pay for the goods you shipped. In such a case, the financial institution will cover the amount outstanding. The letter of credit also protects you against legal risks since you are ensured payment as long as delivery conditions have been met.
  • For exporters, a letter of credit can also be pledged as collateral against working capital loans to help you fill your order.