<P> A letter of credit (LC), also known as a documentary credit, is a written commitment by a bank on behalf of a buyer that payment be made to a seller provided that the terms and conditions stated therein have been met . </P> <P> A letter of credit is an important payment method in international trade . It is particularly useful where the buyer and seller may not know each other personally and are separated by distance, differing laws in each country and different trading customs . A letter of credit is generally regarded to provide a good balance of security between the buyer and the seller, because both rely upon the security of banks and the banking system to ensure that payment is received and goods are provided . In a letter of credit transaction the goods are consigned to the order of the issuing bank, meaning that the bank will not release control until the buyer has either paid or undertaken to pay the bank for their guarantee . </P> <P> In the event that the buyer is unable to make payment on the purchase, the seller may make a demand for payment on the bank . The bank will examine the beneficiary's demand and if it complies with the terms of the letter of credit, will honor the demand . Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs and Practice for Documentary Credits . The current version, UCP 600, became effective July 1, 2007 . Banks will typically require collateral from the purchaser for issuing a letter of credit and will charge a fee which is often a percentage of the amount covered by the letter of credit . </P> <P> The name "letter of credit" is a direct translation of the Italian "Lettera di credito", quite possibly via the French "Lettre de crédit", ultimately from the Latin "credit", he / she trusts, the third - person singular present active indicative of the verb "credere" to trust; though one source derives it rather circuitously from the French "accréditation", power to do something, which derives from the Latin "accreditivus", meaning trust . </P>

Who bears the payment risk in a letter of credit