Letter of Credit

It is a document that is generated by a bank for use by one of its clients. This document expresses the bank’s willingness to guarantee the payment up to a particular amount for transaction of its client who is mentioned in the document.

The letter of credit proves to be beneficial if the client has to travel to different countries where he or she is an unknown entity. This document assists the client in purchasing merchandise on credit because the seller has been guaranteed by the bank of payment. So to speak, the credit risk to the seller is greatly decreased by virtue of the letter of credit since the seller can rely on the credit of the bank rather than the credit of the client.

Keep in mind that a letter of credit is different from a line of credit.