Letter of credit

A letter of credit is a bank’s written undertaking to pay a seller a stated amount against presentation of documents that comply with the credit’s terms, substituting the bank’s credit for the buyer’s. The documentary credit is independent of the sale contract: the bank pays on conforming documents alone. Most commercial credits follow the ICC Uniform Customs and Practice, UCP 600. In shipping a clean on-board bill of lading is usually the key document presented. Standby letters of credit serve as payment guarantees, including for charter hire or as security behind an equity bridge.