Letter of Credit (LC): Meaning and definition

A letter of credit is a document issued by a bank or any other financial institution to guarantee payment from an importer to an exporter. It serves as a secure method of payment in international trade, assuring both parties involved. A letter of credit outlines the terms and conditions under which the payment is made, including amount, currency, shipment details, and required documents. The bank acts as an intermediary, holding funds until the seller meets the stipulated requirements. This mitigates the risk for the seller, ensuring they receive payment, while also protecting the customer or importer, as the payment is contingent on the fulfilment of the agreed-upon conditions.