What is a Letter of Credit and How it Works?

In the arena of international trading, a letter of credit (LC) is a vital financial tool that helps streamline the export-import process and build credibility. To define, it is a letter from a reputable bank or financial institution that guarantees the exporter will receive payment from the importer on time and for the right amount as agreed upon. In case the importer is unable to make the purchase payment, the responsibility of paying the full or remaining amount rests upon the bank extending such letter of credit.

The letter of credit works by guaranteeing both payment and time on behalf of the importer. Internationally-recognised financial institutions such as SUISSE BANK PLC ensure seller protection by issuing an LC, wherein if the importer is unable to make the payment by the stipulated period or later, the bank will pay the same if the exporter fulfils all the conditions mentioned in the letter.