Letters of credit’s purpose is to substitute the credit of the bank for the customer, for the purpose of facilitating trade.

Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits.

A commercial letter of credit is an agreement between the bank, knows as the issuing bank, on behalf of one of it’s customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank opens the letter of credit on the request of its customer. The issuing bank makes a commitment to honor drawing made under the credit. The beneficiary is the provider of services or goods, the issuing bank replaces the bank’s customer as the payee.