A Letter of Credit (LC) — also known as a Documentary Credit — is a financial instrument issued by a bank (the issuing bank) on behalf of a buyer (applicant), guaranteeing that the seller (beneficiary) will receive payment of a specified amount upon presentation of documents evidencing compliant shipment of goods or performance of services, as defined in the LC terms. LCs are a cornerstone of international trade finance, mitigating the counterparty risk that arises when buyer and seller are in different countries with different legal systems and limited mutual trust. Types of LCs include irrevocable, confirmed, standby, revolving, and transferable letters of credit. For investors on Ventura Securities analysing export-oriented companies and banks with significant trade finance businesses, LC volumes, non-performing LC exposure, and LC-backed receivables are important indicators of trade activity health, credit risk in the financial sector, and the working capital quality of companies with large international operations.
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