Quick Definition

A letter of credit is a financial document issued by a bank that guarantees a buyer's payment to a seller will be received on time and for the correct amount.

Examples

• 1A U.S. company imports electronics from Germany and uses a letter of credit to assure the German supplier that payment will be made once the goods are shipped.
• 2A construction company obtains a letter of credit from their bank to guarantee payment to material suppliers for a large project.
• 3An exporter uses a letter of credit to secure payment from a new client in another country, minimizing the risk of non-payment due to unfamiliarity with the client's credit history.

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