Letter of Credit

A bank's guarantee that a buyer's payment will arrive on time and in full.

A letter of credit is a promise from a bank to pay a seller on a buyer's behalf once specified conditions are met, usually proof that goods were shipped. It solves the core problem of international trade: an exporter and importer who have never met, in different legal systems, each need assurance the other will perform. The bank substitutes its own creditworthiness for the buyer's. Fees are small relative to the transaction, which is why letters of credit have greased global commerce for centuries.

The exporter refused to ship until the importer's bank issued a letter of credit covering the full invoice.