A letter of credit (LC) is a financial instrument issued by a bank or financial institution on behalf of a buyer (importer) to guarantee payment to a seller (exporter) for goods or services provided under a trade transaction. Letters of credit serve as a payment mechanism that mitigates credit risk, facilitates international trade, and provides assurance to both parties in the transaction. The issuing bank undertakes to pay the seller a specified amount upon presentation of compliant documents verifying the shipment and delivery of goods or performance of services according to the terms and conditions outlined in the LC. Letters of credit are commonly used in cross-border trade, where the parties may lack trust or have concerns about payment security, currency exchange, or political risks. By acting as an intermediary, the bank assumes credit risk and ensures that the seller receives payment upon fulfillment of contractual obligations, promoting confidence, efficiency, and trust in international trade transactions.