Letters of credit are a financial instrument used in international trade to guarantee payment to a seller. They reduce risk for both buyers and sellers by ensuring that the seller will be paid if they meet the terms of the letter of credit.
Purpose: Facilitates international trade transactions by guaranteeing payment to the seller.
Features:
Reduces risk for both buyer and seller: Provides assurance to the seller that they will be paid and to the buyer that the goods will be shipped as agreed. Issued by a bank: Adds a layer of security and trust to the transaction. Subject to specific terms and conditions: Ensures compliance with the trade agreement. Fees: Banks charge fees for issuing and amending letters of credit.
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