Letter of credit
LC / Documentary credit · LC
A letter of credit is a bank undertaking, issued under applicable rules, to pay a beneficiary against presentation of specified documents that comply with the credit's terms.
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Simply put
What it means in ordinary work
It is a bank-backed payment mechanism used in trade. The bank pays if the documents match the credit, so document accuracy matters more than the underlying shipment story.
Why it matters
It can reduce payment risk between parties who do not know each other well, but it adds cost and administrative burden. It is not a guarantee that the goods themselves are satisfactory.
A hypothetical in practice
A hypothetical importer opens a documentary credit for a shipment. The supplier presents the invoice, transport document and other required documents within the stated period, and the bank checks compliance before paying.
Common pitfalls
A tiny discrepancy can delay payment. Agree document requirements and review them before shipment.
A letter of credit addresses payment risk, not product quality, title or every trade risk.
Scope and limits
General educational explanation. Letters of credit are governed by the specific credit terms, applicable rules and bank requirements. This is not trade finance advice.
Regional lens
How this lands where you work
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As-of date for date-sensitive regional content: 5 November 2026. Read the review policy.