Q.What is a letter of credit? Why does an exporter need this document?

A letter of credit is a guarantee issued by the importer's bank that it will honour the exporter's bills up to a stated amount. The exporter needs it because it is the most secure method of receiving payment — it assures the exporter against the risk of non-payment by the importer, and also helps the exporter obtain pre-shipment finance from its own bank. …

What a letter of credit is

• It is a guarantee issued by the importer's bank that the bank will honour payment up to a stated amount of the export bills.
• It is described as the most secure method of payment for settling international transactions.

Why the exporter needs it

• Assurance against non-payment — In international trade the exporter is dealing with a buyer in another country and must judge the importer's creditworthiness and the risk of non-payment. A letter of credit reduces this risk to a minimum, because a bank stands behind the payment, not just the importer.
• Most secure settlement — Since the importer's bank guarantees payment, the exporter can ship the goods confident of being paid.
• Basis for finance — With the order and the letter of credit in hand, the exporter can approach its own bank for pre-shipment finance to procure raw materials, process, pack and transport the goods. …