Letter of Credit Mechanism

A letter of credit (documentary credit) is a bank's undertaking to pay the seller against documents, provided the credit's terms are met. It's what makes trade between strangers in different countries possible: the seller trusts a bank's promise rather than the buyer's. Most L/Cs are governed by the ICC's UCP 600. Here are the parties, the mechanism, and the terms you need.

The parties

Letter of credit mechanism: the applicant (buyer), beneficiary (seller), and the issuing, advising, and confirming banks, with the flow of the credit and documents.

Party	Role
Applicant	Usually the buyer; requests the issuing bank to open the L/C
Beneficiary	Usually the seller; paid if all terms are met
Issuing bank	Opens the L/C (in the applicant's country); undertakes to pay
Advising bank	Notifies the beneficiary; authenticates the L/C (in the seller's country)
Confirming bank	Adds its own undertaking to pay (usually also the advising bank)