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Finance & Payments

Letter of Credit (LC)

Also known as: LC, Documentary credit

A letter of credit (LC) is a bank's guarantee that a supplier will be paid once agreed shipping and documentary conditions are met.

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Widely used in international trade, an LC substitutes the bank's creditworthiness for the buyer's. The buyer's bank undertakes to pay the supplier provided the supplier presents documents — such as a bill of lading and invoice — proving the goods were shipped as agreed. This protects the supplier against non-payment and the buyer against paying for goods that were never dispatched.

LCs add cost and paperwork, so they are typically reserved for large or cross-border transactions where the parties do not yet trust each other on open account. For established domestic relationships, simpler terms such as net terms or COD are usually more practical.

Frequently asked questions

What is a letter of credit?
A letter of credit is a bank guarantee to pay the supplier once agreed shipping and documentary conditions are met, reducing risk for both parties in a transaction.
When is a letter of credit used?
Mainly in international or large transactions where buyer and supplier do not yet trust each other on open account, so a bank's guarantee bridges the gap.

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