A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a vendor will be received on time and for the correct amount. In the event that the purchaser is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may also be presented as a facility.

Due to the nature of international dealings, such as factors such as distance, differing laws in each country, and subject in knowing each party personally, the use of letters of credit score has become a very important component of international trade.

Key Takeaways

• A letter of credit is a document despatched from a bank or financial institute that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
• Letters of credit are frequently used within the international trade industry.
• There are many distinct letters of credit inclusive of one referred to as a revolving letter of credit.
• Banks collect a fee for issuing a letter of credit.