An LC, also known as a draft, a documentary credit, or bankers' commercial credit, is a letter from a bank guaranteeing that a buyer's payment to a seller will be received with a specified sum in a specified currency, provided the seller meets precisely defined terms within a fixed time frame. In the event that the buyer is unable to make the payment, the bank will cover the full or remaining amount of the purchase.
LCs are one of the most common payment methods available in international trade, as in such contexts, banking channels are used for payment between parties involved who may not trust each other. An LC issued by an issuing bank is often sent to a confirming bank that will undertake to pay the exporter according to the terms of the LC. The following diagram shows a simplified example of an LC process, although a real transaction could...
