Letter of Credit

A letter of credit (LOC) is a document used by financial institutions. It serves as a promise of payment to a seller on behalf of a buyer. Essentially, it’s a third-party guarantee that the seller will get paid under the terms and conditions specified in a contract.

Letters of credit are a proven mechanism that safeguards the interests of both parties. Particularly in international trade, LOCs are commonly used to mitigate the risk involved in cross-border transactions.

For sellers, an LOC provides assurance of payment once a contract is fulfilled. Buyers are protected, too, as the LOC means the seller doesn’t get paid until all the terms of the contract are met.