Letter Of Credit
What is a letter of credit?
A letter of credit is a trade finance instrument issued by a bank that provides a conditional payment commitment to a seller. The bank agrees to pay the seller if the seller presents documents that comply with the terms of the letter of credit.
Why does a letter of credit matter?
A letter of credit can give sellers more confidence that they will be paid and give buyers more confidence that payment will only be made when the required documents are presented.
However, letters of credit are document-driven. Payment depends on documentary compliance, not simply on whether the goods appear acceptable.
What documents may be required?
A letter of credit may require:
commercial invoice
packing list
bill of lading
certificate of origin
insurance certificate
inspection certificate
transport document
beneficiary certificate
Common mistakes
Common mistakes include:
documents that do not exactly match the letter of credit
late document presentation
inconsistent names, dates or shipment details
missing signatures or certifications
misunderstanding the bank’s role
How iTradeDigital helps
iTradeDigital helps structure the transaction and supporting documentation before problems arise. By making document requirements visible from the start, iTradeDigital helps buyers and sellers reduce the risk of discrepancies.
Related terms
Documentary collection
Bill of lading
Commercial invoice
Trade finance
Payment terms
FAQs
Does a letter of credit guarantee payment?
It provides a conditional payment undertaking. The seller must present compliant documents.
Who issues a letter of credit?
The buyer’s bank usually issues it at the request of the buyer.
Why are documents so important in a letter of credit?
Because banks examine documents, not the physical goods themselves.