Logistics Terms
What Is a Letter of Credit (LC) in International Trade?
5 min read
A Letter of Credit (LC) is a commitment from a bank to pay the seller a set amount once the seller presents documents proving the agreed shipping conditions have been met. It is a widely used way to reduce payment risk in international trade.
How an LC works
- The buyer arranges an LC through their bank in favour of the seller.
- The seller ships the goods and presents the required documents.
- If the documents comply with the LC terms, the bank pays the seller.
- The buyer reimburses their bank.
Why traders use an LC
An LC gives the seller confidence of payment and the buyer confidence that payment is only released against compliant shipping documents. It is especially useful with new trading partners or in higher-risk markets. The trade-off is more paperwork and bank fees, and strict document accuracy is essential.