Globalization and the economies of the countries around the world, revolves around the way these countries interact with each other. International trade is the source of this relationship. Buyers and sellers around the world use letters of credit to reduce their worries and improve their transactions. Without letters of credit, there would be great uncertainty due to the number of unknown factors that are involved in international transactions: different laws, currencies, policies, exchange rates, social factors, etc.

A letter of credit or LC works in accordance to the laws already established by international trade. They require the mediation of an issuing bank which puts the interests of the exporter and importer on the table. The issuing bank will make the payments for the merchandise upon its reception when the exporter presents the proper documentation. The conditions of the buyer dictate whether the seller will receive its payment.

In other words, a LC is a written by a bank to make payment to the seller at his request and in accordance with the instructions of the buyer until the specified amount of money within a certain time and upon delivery of the documents indicated. This instrument is one of the simplest in form and the most complex in content.

LC are not only written for the transaction of tangibles but also for the prevision of services.

Through LCs the banks guarantee to pay a specific amount of money to the seller. The latter, has to present the documents that demonstrate that the merchandise or service were delivered as agreed. The LC has a pre established period of duration, once this period is over the LC is no longer useful to the beneficiary.

LCs are credit agreements that define how the issuing bank and the importer will relate to each other. Under this scenario, the LC works as a contract that determines the conditions under which the issuing bank will pay the exporter. Those conditions are set in coordination with the buyer. The bank then commits to pay the exporter even if the buyer is not able to make the payments.