Letter of Credit

A letter of credit is a financial tool that streamlines the process of doing business both nationally and internationally. It provides a guaranteed (usually) form of payment to your suppliers while limiting your risks in the transaction. To better understand letters of credit, let's look at an example.

Let's say that you own a widget distribution company. Let's also say that your good customer provides you with a very large purchase order for widgets. Since you distribute (rather than manufacture) widgets, you'll need to place an order with your widget supplier to be able to fulfill the order. In this case, you want to use a new widget supplier that is located in Asia and does not know much about your company...

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