What is the term for a bank-guaranteed payment document in international trade?

A letter of credit is a bank-guaranteed payment document used in international trade.

In a typical transaction, the buyer asks a bank to issue the letter in favor of the seller. The bank promises payment when the seller presents documents showing that the shipment and other stated conditions comply with the credit’s terms. The arrangement reduces the seller’s risk that an overseas buyer will not pay.

Banks examine documents rather than the physical goods themselves. Common documents may include a commercial invoice, transport document, insurance certificate, or inspection certificate. Because small documentary discrepancies can delay payment, accuracy is crucial.

A letter of credit is not an invoice, bill of lading, or insurance policy. Those documents may appear in the transaction, but they serve different purposes. Letters of credit became especially important as international commerce expanded across borders with unfamiliar legal systems and business partners.