Letter of credit (L/C)

A guarantee from the issuing bank´s to the seller that if compliant documents are presented by the seller to the buyer´s bank, then the buyer´s bank will pay the seller the amount due. These instruments are used by exporters and importers, and usually provided by the importing company´s bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. The common approach is for the customer´s bank to issue a ´letter of credit´ at the request of the buyer, to the seller. The letter of credit essentially guarantees that the bank will pay the seller´s invoice (using the customer´s money of course) provided the goods or services are supplied in accordance with the terms stipulated in the letter, which should obviously reflect the agreement between the seller and buyer. This gives the supplier an assurance that their invoice will be paid, beyond any other assurances or contracts made with the customer. The customer´s bank charges a fee to issue a letter of credit, and the customer pays this cost.
The ´compliance´ of the seller´s documentation covers not only the goods or services supplied, but also the timescales involved, method for, format of and place at which the documents are presented.