A letter of credit is a letter issued by a bank as a guarantee that a payment will be made on time to a seller. It is a nonnegotiable formal trade instrument. Letters of credit are usually used in goods delivery or after completing a service.
It is a letter from the bank, guaranteeing that the buyer will make the payment for a specified good at the right time and for the mentioned amount. Letters of credit are quite common in international trades where buyers and sellers do not know each other personally. It offers a certain degree of security to both the buyer as well as seller.
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