The letter of credit - LC

The letter of credit is the most widely used instrument of international banking. It has facilitated international trade for a very long time, especially during times of economic and political uncertainly.
The letter of credit is the bank instrument that assures the person selling merchandise of payment if he makes the agree-upon shipment. On the other hand, it also assures the buyer that he is not requires to pay until the seller ships the goods. It is thus a catalyst that provides the buyer and the seller with mutual protection in dealing with each other.
An international trading transaction begins when a buyer and a seller sign a contract that records all the elements of the transaction: the merchandise, price, method of payment, delivery date, and method of shipment, as well as specifics, the buyer and seller must arrange payment. The buyer will want possession before paying, and the seller will want payment before making delivery. Since each party often has incomplete knowledge of the other, there is a certain caution to their dealings.
To be safe, the buyer and seller use the letter of credit. The buyer requests his bank to issue a letter of credit in favor of the seller. Assuming that the credit risk is acceptable to the bank, it issues its letter of credit. Basically, the letter says to the seller: we, the bank promise that we will pay you when you have made the agree-upon shipment. The bank thus substitutes its credit for that of the buyer, which might also be good but probably is not as well known. The letter of credit also protects the buyer, for he knows that he will not be called upon for payment by his bank until the evidence shows that the shipment has actually been made.