What is L/C?

Letter of Credit (L/C) - A document issued by a bank per instructions by a buyer of goods authorizing the supplier to draw a specified sum of money under specified terms. Issued as revocable or irrevocable.

A letter of credit is a document issued by a financial institution, or a similar party, assuring payment to a supplier of goods or services provided certain documents have been presented to the bank. "Letters of Credit" are documents that prove the seller has performed the duties specified by an underlying contract (e.g., the sale of goods contract) and the goods/services have been supplied as agreed. In return for these documents, the beneficiary receives payment from the financial institution that issued the letter. The letter of credit serves as a guarantee to the seller that it will be paid regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter's issuer. The letter can also be used to ensure that all agreed standards are met by the supplier, provided that these requirements are reflected in the documents described in the letter of credit.