What is a letter of credit? How banks guarantee trade payments
By SendPay Business · · 2 min read
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.
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.
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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. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.