Part of the Key Freight Documents Guide
A Letter of Credit is an advance instruction by your bank to an overseas bank to guarantee payment to the seller once certain delivery conditions have been met.
Your bank pays the outstanding amount even if you are unable to make payment. One way to side-step this is using trade financing, in which case the lender would simply advance the payment to the supplier, while you pay the financing company down the line.
Why do I need a Letter of Credit?
There is normally a substantial delay between an international trade deal and receipt of goods (and, therefore, payment).
To show good intention to the seller, buyers often use a Letter of Credit.