A Beginner’s Guide to Letters of Credit in International Trade

When companies cross borders to buy or sell, there’s inherent risk. Will payment happen? Will goods arrive? That’s where tools like Letters of Credit (LCs) come in.

What is a Letter of Credit?
A financial instrument where a buyer’s bank guarantees payment to the seller once the agreed conditions are met (shipping documents, inspection, etc.).

Why do Letters of Credit matter?
They build trust between buyer and seller, reduce payment risk, and can open markets for exporters who might not have prior relationships with buyers.

Types of Letters of Credit include:
• Confirmed vs. Unconfirmed
• Revocable vs. Irrevocable
• Standby LCs

Typical Use Case:
An exporter in country A ships goods; they present required documents to their bank, which verifies conditions; upon verification, the buyer’s bank pays through the LC.

Letters of Credit remain a backbone of international trade, especially in early or uncertain relationships when full trust isn't yet built.