A letter of credit is a contractual commitment by an importer's bank to pay an exporter once goods are shipped and documentation is provided, protecting both parties. Letters of credit are recommended for higher-risk international sales involving new relationships or extended payment terms. Exporters should consult their bank on costs and disputes before an importer applies for a letter of credit. The importer applies to their bank to open a letter of credit based on the sales agreement, which then transmits it to the exporter's bank for review and approval. The exporter ships goods and submits documents to their bank, which checks for compliance before submitting to the importer's bank for payment.

1. Letter of credit

2. • What is a Letter of Credit?
• A Letter of Credit is a contractual commitment by the foreign buyer’s
bank to pay once the exporter ships the goods and presents the
required documentation to the exporter’s bank as proof.
• As a trade finance tool, Letters of Credit are designed to protect both
exporters and importers. They can help you win business with new
clients in foreign markets. This means the exporter gets a guarantee
of payment while offering the importer reasonable payment terms.

3. • Before Applying for a Letter of Credit
• Letters of Credit are one of the most secure payment instruments available but can be
labor-intensive and relatively expensive due to bank fees. They are recommended for use
in higher-risk situations, when the importer’s credit is unacceptable or not available,
when dealing with a new or less-established trade relationship or when extended
payment terms are requested.
• The required documents are detailed and prone to errors and discrepancies. To avoid
payment delays and extra fees, documents required by the Letter of Credit should be
prepared by trained professionals.
• Additionally, the exporter should consult with their bank before the importer applies for
the Letter of Credit. Ask about:
• What type and size of export transactions are suitable for a Letter of Credit?
• How much does a Letter of Credit cost? Who pays the fees?
• How are disputes resolved between importer and exporter?

4. • How to Apply for a Letter of Credit
• The exporter and their bank must be satisfied with the creditworthiness of the importer’s bank.
Once the Sales Agreement is completed, the importer applies to their bank to open a Letter of
Credit in favor of the exporter.
• The Importer’s bank drafts the Letter of Credit using the Sales Agreement terms and conditions
and transmits it to the exporter’s bank. The exporter’s bank reviews and approves the Letter of
Credit and sends it to the exporter.
• The exporter ships the goods in the manner provided for in the letter of credit and submits the
required documents to their bank. A freight forwarder may be used to assist in this process.
• The Exporter’s bank checks the documents for compliance with the Letter of Credit terms and
conditions. Any document errors and discrepancies must be amended and resubmitted. After
approval, the exporter’s bank submits the complying documents to the importer’s bank.
• The importer’s bank releases payment to the exporter’s bank. The importer’s account is and their
bank releases the documents to the importer to claim the goods and clear customs.

5. • https://www.trade.gov/letter-credit