Understanding Letters of Credit

Use letters of credit to:

• Protect against buyer risk.

  If the buyer is of unknown creditworthiness, then the seller has the security of the bank's payment undertaking.

• Protect against country risk.

  The buyer may be willing and able to pay, but economic or political conditions in the buyer's country may prevent or delay payment. In these situations, a confirmed letter of credit is necessary. A bank in the seller's country will (for a fee) add its own payment undertaking to that of the issuing bank.

• Meet mandatory requirements.

  Letters of credit are also used as part of exchange control or import control regimes operating in the buyer's country.