Letter of Credit
A letter of credit (commonly referred to as an “LC”) is a document issued by a bank that essentially acts as a guarantee of payment to a designated beneficiary. For example, your company wants to purchase $100,000 in inventory from a Taiwanese supplier with a 60-day payment term. The supplier will accept your 60-day payment term but only if your company obtains a 90-day LC from your bank. The LC names the supplier as the beneficiary and represents a guarantee from the bank that it will pay the supplier within 90 days if your company does not. LCs are common in the import-export business because many suppliers believe it is too risky to extend credit to companies in foreign countries without the guarantee of an established bank.
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