Letter of credit

A letter of credit or LC is a crucial financial tool in international trade. It represents a bank's promise on behalf of a buyer to pay a seller a set amount if certain conditions usually involving key shipping and commercial documents presented within a specific time frame are met. Both UK and US markets use letters of credit with minor terminology variations. Involving banks as intermediaries reduces the risks of non-payment and non-delivery building trust and confidence between buyers and sellers in different countries. The process starts when a buyer and seller agree to use a letter of credit. The buyer asks their bank, the issuing bank to open the letter in favor of the seller, the beneficiary. The seller's bank known as the advising or confirming bank shares the terms and verifies authenticity. The seller ships the goods and submits required documents like the bill of lading and invoice. Payment is released only if all terms are met, providing security to both parties. There are several types of letters of credit including revocable, irrevocable and standby letters. The irrevocable letter of credit is most common as it cannot be changed or canceled without all parties agreement. Standby letters of credit are often used as guarantees rather than for immediate payment. While letters of credit reduce many risks in international trade, challenges such as documentary discrepancies,