A letter of credit - sometimes known as 'documentary credit' - is basically a conditional guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time providing documents called for under the credit are presented in order.
Why use a letter of credit?
Letters of credit are most commonly used when a buyer in one country purchases goods from a seller in another country. The seller may ask the buyer to provide a letter of credit to guarantee payment for the goods.
Read more about the advantages and disadvantages of letters of credit.