A letter of credit is a document from a bank that guarantees payment. There are several types of letters of credit, and they provide security when buying and selling.
Seller protection: If a buyer fails to pay a seller, the bank that issued a letter of credit will pay the seller if the seller meets all of the requirements in the letter. This provides security when the buyer and seller are in different countries.
Buyer protection: Letters of credit can also protect buyers. If you pay somebody to provide a product or service and they fail to deliver, you might be able to get paid using a standby letter of credit. That payment can be a penalty to the company that was unable to perform, and it’s similar to a refund, allowing you to pay somebody else to provide the product or service needed.