Industry estimates suggest that 60–75% of initial document presentations under letters of credit are rejected by banks due to discrepancies with the L/C terms. For a seller who has already shipped goods and expects payment, a bank’s refusal is a serious problem. The roots of this problem lie in one fundamental principle: strict compliance with documentary requirements. In our overview article on letters of credit we covered the general mechanics of L/Cs—how they are opened,…
A letter of credit is a secure payment method between a seller and a buyer, ensuring payment for the delivery of goods or services upon the presentation of relevant documents to the bank. In this introductory article, we will explore what a letter of credit is, how it works, its key features, differences from other financial instruments, and practical tips for its use. How a Letter of Credit Works In simple terms, a letter of…