Letter of Credit (LC) reduces the risk associated with non-receipts. A payment guarantee given to the seller from the buyer’s bank is a letter of credit. Banks usually finance against LC, which reveals inborn security to the seller. It means that the bank takes charge of the payment. Besides letters of credit, banks offer other services like open account financing, supply chain finance, etc. A few trade finance firms also provide LC and supply chain finance. Such trade finance companies provide invoice factoring, structured trade finance, receivable discounting and various other customizable products.
A contract that the bank agrees to take responsibility for the buyer’s payment to the seller is called a Letter of Credit (LC). A letter of credit states that the seller will be paid for their goods once the shipment reaches the buyer. Usually, banks accept to produce LC only when the seller has evidence of the shipment of the goods and specified documents. When the buyer opens an LC with its bank, the seller will present the essential documents required for an LC to the issuing bank. Once the bank verifies the documents and evidence of shipment, it will pay the seller and produce the documents to the buyer. The buyer can claim the carrier for their goods upon receiving the documents. LC is the most commonly used payment method in international trade but less used in domestic trade.