Q.Why is a letter of credit considered the most secure method of payment in export trade?

In export trade the buyer and seller are strangers in different countries, so each is wary of parting with goods or money first. A letter of credit removes this fear by bringing a bank in between.

In export trade the exporter and importer are in different countries and often do not know one another. The exporter hesitates to ship valuable goods on the buyer's mere promise, and the buyer hesitates to pay before shipment. A letter of credit resolves this deadlock:

• It is a written undertaking by the importer's bank that it will pay the exporter a stated sum provided the exporter presents the specified documents within the stated time and in strict conformity with the credit.
• As a result, the exporter's assurance of payment rests on a bank's undertaking, which is far more dependable than an unknown buyer's promise.
• The bank pays against documents, so the exporter is confident of getting paid once he ships correctly and presents the right documents, and the importer is confident that payment is made only on proper shipment. …

Avoid saying the letter of credit is issued by the exporter's bank — it is issued by the importer's (buyer's) bank. The security comes fro …