What Is A Commercial Letter Of Credit?

Foreign trade payment problem is mainly solved by a commercial letter by credit. A letter of credit is issued by the importer's bank. If guarantees payment to the exporter upto specified amount of money provided the terms and conditions lay down in the letter of credit is fulfilled. A letter of credit is a document issued by the importing country's banker authorizing the exporter country's banker to honour the cheques of the exporter to the extent of the amount mentioned therein. In this way the exporter is protected by a suitable bank enjoying good faith and credit for that of an importer who is comparatively unknown. The importer is also protected as the letter of credit specifies in close detail all the things an exporter must do to receive payments. A letter of credit consists of an undertaking by an issuing banker that bills drawn by the exporter will be dully honored provided they comply with the terms of credit.

A letter of credit is a commitment on the part of the buyer's bank to pay or accept draft upon it provided drafts do not exceed a specified amount.  A letter of credit thus is a written undertaking by an importer's bank to a third party that it will pay or accept drafts drawn upon it upto a stated sum of money within a specified time that the payment will only be made to the exporter if he complies with the specified terms of credit.