Letter of Credit (L/C)
Category: payment
A bank-guaranteed payment instrument ensuring the seller gets paid once shipping documents are verified.
A Letter of Credit (L/C) is a financial instrument issued by a bank guaranteeing payment to a seller upon presentation of specified shipping and trade documents. LCs provide security for both parties in international trade: the seller is assured of payment if they meet the terms, and the buyer only pays when goods are shipped as agreed. LCs are commonly used for high-value cross-border transactions where parties lack established trust.
Examples
- • A Chinese manufacturer receiving an LC from a US buyer can ship goods with confidence that the bank will pay upon presentation of proper documents.
- • LC fees typically range from 1-3% of the transaction value and include bank charges from both the issuing and advising banks.
- • An irrevocable LC cannot be modified without the consent of all parties, providing stronger protection than a revocable LC.