A letter of credit is a documentary agreement, typically from a bank (Issuing Bank), assuring that a seller (Beneficiary) will receive payment up to the amount of the letter of credit, as long as certain documentary delivery conditions have been met. In the event that the buyer (Applicant) is unable to make payment on the purchase, the Beneficiary may make a demand for payment on the bank. The bank will examine the Beneficiary’s demand and if it complies with the terms of the letter of credit, will honor the demand.
Fun fact: The name “letter of credit” derives from the French word “accréditation”, a power to do something, which derives from the Latin “accreditivus”, meaning trust
The letter of credit states what documents the Beneficiary must present, what information they must contain, and the place and date it expires. Beneficiaries who sell goods and utilize a letter of credit as the method of payment have the assurance of the issuing bank that if they present the documents stated in the letter of credit, the issuing bank will honor their demand for payment. Learn more
Incoterms are a set of three-letter standard trade terms most commonly used in international contracts for the sale of goods. It is essential that you are aware of your terms of trade prior to shipment.
View the letters of credit process >> Learn more