Letter of Credit

A letter of credit (LC) is a document that takes the form of a letter that is issued by a financial institution and will be sent to another financier (possibly in another country). It will act as a guarantee for payment to a specific person and will only effect payment when specified conditions are fulfilled. The LC will guarantee the amount to be paid, time and other related terms; with a bank guarantee for payment in compliance with such conditions. The bank will make sure that payment is received when products have been shipped. The parties to an LC will be the issuing bank, beneficiary and sometimes the advising bank. Most LC’s are irrevocable.