Trading internationally can involve risks. Exporters run the risk of buyers failing to pay for goods, while importers may risk paying but never receiving anything. Because of the distances involved, it may be difficult to resolve any disputes.
One way of reducing the risks is to use a letter of credit. A letter of credit is a written undertaking by a buyer's bank to pay the exporter's bank: it guarantees a payment of a specific amount of money, provided the exporter presents the required documents within a fixed timeframe. This can offer a conditions guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made unless the bank receive documents called for under the letter of credit.
There are several different types of letters of credit available to use, depending on the circumstances.
This guide highlights the advantages and disadvantages of letters of credit, explains when to use a letter of credit and the types of letter of credit available. It also explains the international rules for letters of credit.