Glossary · Business & Sourcing
What Is Letter of Credit?
A letter of credit is a bank instrument in which the buyer's bank commits to pay the seller once specified documents are presented and found compliant. It substitutes the bank's credit for the buyer's, which is why it is used on first orders between parties that do not yet know each other.
Why it matters when you source
A letter of credit protects both sides but adds cost and documentary discipline, since a single discrepancy can stop payment. For a first order with a new factory it can be the fairest structure; for repeat orders it usually costs more than it is worth.
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