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.
Related terms
Bill of Lading (B/L)
The carrier’s document that acts as a receipt for cargo, a contract of carriage, and a document of title.
Commercial Invoice
The seller’s bill to the buyer, and the primary document customs uses to assess value, duty, and tax.
Certificate of Origin (CoO)
A document certifying the country in which the goods were produced, used to determine duty treatment.
Incoterms
ICC-published trade terms (EXW, FOB, CIF, DDP…) that define who pays and bears risk at each step.
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