Question

What is a letter of credit ? Why does an exporter need this document?

Answer 1

A letter of credit is a guarantee issued by the importer's bank that it will honour up to a certain amount of export bills to the bank of the exporter. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.

The exporter needs this letter to insure against the non-payment of dues by the importer in the foreign country as there is always a risk in the collection of payment from the importers. Thus, in order to protect the exporter from financial loss "letter of credit" is needed.