The letter of credit is the most used international payment method in import/export transactions. It
guarantees the transaction's success through an institutional intermediary, such as a bank, to whom is
given the irrevocable order to pay a certain sum after receiving the documents.
This documentary credit involves four parties (applicant, beneficiary, issuing bank and advising bank). After theapplicant provides the documents in conformity with the letter of credit's resolution and the
documents' delivery is successful, the exporting company will receive the payment agreed. With the letter
of credit, intermediary banks have a payment obligation: that is why using it in your trade relations
constitutes a choice with a high level of safety since it resizes the risks of default with a guarantee that goes
through all stages of the transaction.
The letter of credit protects both the importing company because it involves payment only after the documents' emission (e.g. transport documents) and the exporting company. Opening a documentary credit, the bank cannot deny the payment once the papers have been issued correctly. It is often used when the companies do not know each other, when there are uncertainties for the importing company to meet its commitments or when the country risks are high.
It's an instrument with easy and uniform guidelines that include, however, a good outcome, a document's request according to international regulations (Uniform standard and practice by the international chamber of commerce and International Standard Banking Practice) meeting the deadlines.