Letter of Credit

A letter of credit is a guarantee from the bank that a company will pay for what it owes. For example, let’s say that our company buys $1 million worth of goods, but the seller is worried that we won’t pay for our goods. The seller requires us to get a letter of credit. The letter of credit is sent by the bank saying that if we don’t pay the $1 million for the goods, then the bank will pay the $1 million. A letter of credit is a guarantee to the seller that they’re going to get their money either way.