What is a Letter of Credit

A letter of credit is a document that states irrevocable payment undertaking from a buyer to present to the seller. It is issued by a financial institution and acts like a binding contract that guarantees the payment for good or services will be paid to the seller.

Letter of Credit explained

A letter of credit is a written contract that guarantees that the buyer will pay a specified amount to the seller. The buyer’s bank, usually referred to as the issuing bank, administers this written commitment to the seller’s bank, also called the accepting bank.

The amount specified in the letter of credit has to be agreed on by both parties involved, in a specified currency. Additionally, the seller has to comply with all conditions outlined and has to submit any relevant documents detailed in the letter of credit.

A letter of credit acts as a guarantee that the payment will be completed within a certain time period. However, the bank or financial institution that issues the letter of credit does not have any responsibility in terms of the quality of goods/services or on the other specifications of the written contract.