Letter of credit

A letter of credit is commonly used in international trade to reduce some payment uncertainty between buyer and seller. The issuing bank undertakes payment under the credit's terms against compliant documents, while the applicant remains responsible to the bank under its agreement. The instrument deals in documents rather than independently guaranteeing the quality of the goods; discrepancies, bank credit risk, fees, timing and the precise terms matter. Confirmation by another bank can alter the allocation of bank risk. It is distinct from a grant or a promise that every trade dispute is resolved.