Category: Documents
Letter of Credit (L/C)
Also known as: L/C, Documentary Credit
Definition
A bank’s written undertaking to pay the seller once compliant shipping documents are presented.
A letter of credit is a payment instrument in which the buyer’s bank guarantees payment to the seller provided the seller presents documents that exactly match the credit’s terms — typically the bill of lading, invoice, packing list, and certificates.
The L/C substitutes the bank’s creditworthiness for the buyer’s and reduces non-payment risk in cross-border trade. Strict documentary compliance is critical: even minor discrepancies can entitle the bank to refuse payment.
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