Letter of Credit (LC) — definition
Payment instrument issued by a bank on behalf of a buyer, guaranteeing payment to a seller upon presentation of specified documents that confirm contractual obligations have been met.
Letters of credit are widely used in international equipment trade to reduce payment risk for both buyer and seller, since payment is conditional on compliant documentation rather than trust between the parties alone. Common variants include irrevocable, confirmed and standby letters of credit, each offering different levels of assurance.
Why it matters to industrial buyers
A letter of credit reduces counterparty risk in cross-border industrial purchases, giving suppliers payment assurance and giving buyers confidence that funds are released only against agreed documentation.
Key reference points
Common use
Letters of credit are commonly used for cross-border machinery and equipment purchases where buyer and seller have limited prior trading history.
Commonly confused with
Credit insurance
A letter of credit is a bank payment guarantee tied to specific documentation; credit insurance protects a seller more broadly against buyer non-payment risk across transactions.
How it is used in practice
An equipment buyer arranges an irrevocable letter of credit to reassure an overseas supplier before production begins.
Frequently asked questions
Who pays for a letter of credit?
Bank fees are commonly borne by the buyer applying for the letter of credit, though this can be negotiated between the parties.
What triggers payment under a letter of credit?
Payment is released when the seller presents documents, such as shipping and inspection certificates, that strictly comply with the letter of credit's terms.
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Related terms
Credit Insurance
Insurance policy that protects a seller or lender against the risk of non-payment by a buyer, commonly used to support export sales and trade financing of industrial equipment.
Working Capital Facility
Short-term financing arrangement, often revolving, that provides a company with funds to cover day-to-day operating expenses such as inventory, payroll and receivables.
Factory Acceptance Test (FAT)
Formal verification test conducted at the supplier's manufacturing facility to confirm equipment meets agreed specifications before shipment to site.
Vendor Financing
Financing arrangement in which an equipment supplier or its affiliated finance arm extends credit terms directly to the buyer to facilitate the equipment purchase.
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Reference content only. Global B2B Group is independent of equipment manufacturers and financing institutions; definitions are provided for education and do not constitute engineering, financial or legal advice.