A Letter of Credit is literally a “letter” pertaining to a sales transaction between a buyer and seller. The “letter” is initiated by the buyer and is directed to the seller or beneficiary, in most cases. In some cases, the beneficiary may not necessarily be the Seller but would be the party possessing the right to receive payment for the goods or services. A Letter of Credit is the traditional worldwide risk management tool for international transactions. Issued by a foreign bank (representing the buyer) and confirmed by a corresponding bank usually in the country of the seller, a Letter of Credit is the overseas bank’s commitment to pay the seller’s drafts.
A Letter of Credit is opened by an issuing or opening bank. The buyer chooses the opening bank.
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