Letter of Credit is payment method that's commonly used in international business. It's a document issued by financial institute, mostly banks, promises that it will honor the draft if the seller's conditions that written in the L/C are met. Through L/C the bank substitutes its own commitment to pay for its customer, or opener. Letter of credit provides great degree of safety for both importer and exporter. The advantages of exporter using letter of credit are that L/C eliminates credit risk if the bank that opens it is of undoubted standing, therefore the firm only to check the credit reputation of the issuing bank, which is much easier. L/C also reduces the danger that payment will be delayed or withheld because of exchange controls and other political acts. Countries generally require local banks to honor their letters of credit, failure to do so will damage the country's credibility. L/C will reduce uncertainty since exporter knows all the requirements for payment, it's all written in the L/C. L/C can also guard against preshipment risks, exporter who manufactures under the contract can have a protection against the risk of order cancellation before the shipment. L/C also facilities financing because it ensures the exporter a ready buyer for its product, and it become easy to create a banker's acceptance. The importer also gets advantages by using L/Cs because the payment is only processed when all the conditions are met. The bank is responsible for all the inspection. All documents are carefully inspected by experienced clerks, the bill of lading, the invoice, the insurance corticated and any other documents. Because L/C is almost good as cash in advance, the importer can command better credit term or prices. Some exporters even sell only on L/C, willing to provide one will be easier to engage in business. L/C financing may be cheaper to some alternatives since there is not tie-up cash, the L/C only require certain amount of deposit. And if prepayment is required, the importer is better off depositing its money with a bank than with the seller because it's easier to recover the money if seller did not make proper shipment.   Source: http://en.wikipedia.org/wiki/Letter_of_credit