Why Use a Letter of Credit in International Trade?
The main reasons buyers and sellers choose a Letter of Credit, and the trade-offs.
Reviewed by LCCheck team (owner-approved) · 2026-10-12
Short answer
A Letter of Credit bridges trust between buyer and seller who do not know each other or are far apart: the seller gets a bank's undertaking to pay, and the buyer gets assurance that payment happens only against specified documents. The trade-off is cost, paperwork and the need for precise document compliance.
| Seller gains | Bank payment undertaking |
|---|---|
| Buyer gains | Payment only against agreed documents |
| Trade-off | Fees and strict document compliance |
Good reasons
- New trading relationship.
- Large or high-value order.
- Country or currency risk.
- Buyer needs to show its bank-backed commitment.
Alternatives
- Open account.
- Documentary collection.
- Cash in advance.
- Standby Letter of Credit as backup.
Sources
- ICC — UCP 600 (Uniform Customs and Practice for Documentary Credits)
- US International Trade Administration — Letters of Credit
General guidance, not legal advice. Your bank examines documents independently.
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