In international trade,Letter of CreditIt is a crucial payment method, which provides a safe and reliable transaction guarantee mechanism for transnational buyers and sellers. Letters of credit can play a bridging role in trade activities between different countries and regions, ensuring the protection of the interests of both parties. The following are several key reasons why letters of credit are widely used:

Risk reduction
From the buyers perspective: The letter of credit ensures that the bank will make payment only when the seller complies with the contract terms and the detailed requirements of the letter of credit, such as delivering the correct goods and documents on time. This provides the buyer with a safety guarantee for receiving the goods.
From the sellers perspective: Once the seller meets all the conditions of the letter of credit and correctly submits the required documents, they can ensure the receipt of payment. This reduces the risks arising from the buyers refusal to pay or payment delay.

Clear legal framework and settlement
Letter of credit transactions are guided by internationally recognized rules such as the Uniform Customs and Practice for Documentary Credits (UCP). These rules provide a clear legal framework for letter of credit transactions. Every participating bank must abide by these rules, thus ensuring the legitimacy and clarity of the transaction.

Improvement of trade efficiency
The use of letters of credit can speed up the transaction process, because the banks participation ensures that all documents meet the requirements, which helps to avoid delays in goods delivery caused by document errors. In addition, letters of credit provide immediate payment, and the seller does not have to wait until the buyer inspects the goods to receive payment.

Flexibility and diversity
Letters of credit come in various forms, including revocable letters of credit, irrevocable letters of credit, transferable letters of credit, etc., to meet different trade needs and specific transaction conditions. This enables letters of credit to be flexibly applied in various trade scenarios.

Enhancement of trust
Between new trading partners who have not established a long - term business relationship, the letter of credit, as a third - party guarantee, helps to build trust, enabling both parties to conduct business in a relatively safe environment.

Operation process

The buyer applies for the opening of a letter of credit:The buyer submits a letter of credit application to the sellers bank (beneficiary bank) through its bank (issuing bank).
Review and modification of conditions:Both parties can review the terms of the letter of credit and modify them as needed to ensure that they fully comply with the contract provisions.
Issuance of the letter of credit:The issuing bank issues the letter of credit and sends it to the beneficiary bank through the banking channel.
Submission of documents:The seller prepares and submits relevant shipping and commercial documents to the beneficiary bank in accordance with the requirements of the letter of credit.
Document review:The beneficiary bank reviews the documents to ensure compliance with the terms of the letter of credit.
Payment:Once the documents are confirmed to be correct, the issuing bank makes payment to the seller.

In summary, letters of credit play a key role in global trade. They not only ensure the safety and efficiency of transactions but also reduce the uncertainty and risks of both parties in the international market through standardized operations.