The letter of credit (aka documentary credit) is a payment mechanism typically used in international trade of goods exported to remote regions when advance payment is not possible. Naturally, payment by the buyer on the purchase is the most favourable for the seller. However, this payment method is not the best interest of the buyer whose prime concern is to be able to view and check the quality of the purchased goods and make complaints, where applicable, before the payment.

The aim of the letter of credit (LOC) issued by financial institutions is to balance the conflicting interests. The letter of credit is subject to conditions, provides irrevocable payment guarantee and – among others – also defines the payment method of the transaction: immediate payment, deferred payment, acceptance of bills of exchange or negotiable letters of credit (i.e. by bank nominated by the issuing bank). Having requested the bank to issue the letter of credit; the buyer shall provide information, details of the transaction required for the bank to issue the LOC based on the terms and conditions of the foreign trade agreement; in the event of full compliance, the seller can draw the amount specified in the letter of credit. On the other hand, documentary credit is also beneficial for the seller as the risk of non-payment is reduced because it is not directly the buyer but their bank who makes a promise, thus the bank takes responsibility for payment.

To enhance the security of transactions, documentary credits are covered by international regulations, which were issued by the International Chamber of Commerce (ICC) in publication No. 600 (ICC Uniform Customs and Practice for Documentary Credits – UCP 600).