What is a letter of credit? How banks guarantee trade payments
By SendPay Business · · 2 min read
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- 2Choose what it does
- 3Launch when you are ready
A letter of credit is a promise from a bank to pay a seller on behalf of a buyer, as long as the seller shows the right documents. It's widely used in international trade, where buyer and seller may not know or trust each other.
How it works
- The buyer asks their bank to issue a letter of credit in the seller's favour.
- The seller ships the goods and gathers the documents the letter asks for, such as the bill of lading and invoice.
- The banks check the documents match the terms exactly.
- If they match, the bank pays the seller and the buyer's account is charged.
Why businesses use them
The seller knows a bank will pay if they meet the terms, and the buyer knows payment only goes out once proof of shipment arrives. That trust makes it easier to trade with new partners abroad.
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The downsides
Banks charge fees to issue and check letters of credit, and small mistakes in the documents can delay payment. For smaller or repeat orders, many businesses use simpler options such as a deposit plus a bank transfer on delivery.
Where SendPay fits
SendPay doesn't issue letters of credit. SendPay platforms let businesses hold GBP, EUR and USD, send money and invoice customers under their own brand, powered by licensed partners.
How it works
Money on its way- 1Pick who to pay and type the amount
- 2Tap send and it is on its way
- 3It lands in their account
Why sign up
Create your free SendPay account
It's all about creating your own financial platform with ease. Start with a free account today.
- 🪪A free business accountOpen it in about a minute with your business name, email, password and mobile. No card and no documents to start.
- 💳Get paid from day oneTake card payments, and share your own payment link and invoices so customers pay in a click.
- 🌐A free business websiteFree to build, free to publish and free to keep, with unlimited visits.
- 🚀Your own financial platformDesign and preview your whole platform free, then launch when you are ready.
SendPay Business is a technology company, not a bank. Accounts, cards and payments are powered by licensed partners.
Questions people ask
How much does a letter of credit cost?
Enter your bank's fees and the order value in the free calculator.
Letter of credit cost calculator →Read next
Spotted a mistake or something out of date? and we'll fix it. How our guides are made
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.