Full definition
A financial instrument issued by the buyer's bank guaranteeing payment to the seller upon presentation of specified documents proving shipment and compliance with agreed terms. Letters of credit (L/C) are the primary payment security mechanism in international B2B trade, particularly for first transactions between new trading partners or for large-value orders. Types: (1) Irrevocable — cannot be modified without all parties' consent (standard, most common). (2) Confirmed — a second bank (in the seller's country) adds its guarantee, protecting against buyer country risk. (3) Standby — backup guarantee, drawn only if the buyer defaults on direct payment. (4) At sight — payment immediate upon document presentation. (5) Usance/deferred — payment after a specified period (30, 60, 90 days). Required documents typically include: commercial invoice, bill of lading, packing list, certificate of origin, insurance certificate, and inspection certificate. Per ICC UCP 600 (Uniform Customs and Practice for Documentary Credits — the international framework governing L/C transactions). Cost: 1-3% of L/C value. For rubber imports from Asia to Mexico: L/C is standard for orders >$20,000 with new suppliers. The L/C protects both parties: seller is guaranteed payment if documents are correct; buyer is guaranteed the goods were shipped as specified.