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A Letter of Credit (LC or LoC) is a financial instrument issued by a bank guaranteeing that a seller will receive payment once specific terms and conditions of the trade are met. It provides trust and security for both importer and exporter in international trade.
The most common are revocable and irrevocable LCs, standby LCs, revolving LCs, confirmed LCs, and transferable LCs. Each type is designed for different trade scenarios, from one-off transactions to long-term supply contracts.
Cash flow gaps, purchasing stock, funding expansion, managing seasonal fluctuations, supporting international trade, or other.
Each type of business funding works differently and comes with its benefits.
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It builds trust between trading partners by ensuring that exporters get paid promptly once they present the required documents. For importers, it guarantees that payment will only be made if goods are shipped as agreed. It reduces the risk of fraud and contractual disputes.
Largely used in cross-border trade where buyers and sellers are working together for the first time or where large sums are involved. Common industries include commodities, textiles, machinery, and chemicals.
Letters of Credit are document-driven. Accuracy is essential, as banks only pay against compliant documents. They can be costly due to bank fees and require careful drafting to protect all parties.
Yes, it is a binding commitment from the issuing bank.
Typically the importer, though costs can be shared.
Usually 1–2 weeks depending on complexity.
An irrevocable LC cannot be cancelled without consent from all parties.
Primarily yes, though in some cases it can be used for service contracts.
