Its biggest advantage is to use bank credit as a guarantee payment. Exporters only need to submit various documents according to the requirements of the letter of credit, so that they can get the payment from the bank. Because the payment of the payment is conditional on obtaining the shipping documents that meet the requirements of the letter of credit, the risk of prepaying the payment is avoided, so the payment method of the letter of credit solves the contradiction between the importer and the exporter in terms of payment and delivery to a great extent.
A letter of credit for expanding knowledge refers to a written document that a bank (issuing bank) pays a third party (beneficiary) or its designated party according to (applicant's) requirements and instructions or on its own initiative, and in line with the terms of the letter of credit. That is, a letter of credit is a written document issued by a bank that promises conditional payment.
In international trade activities, buyers and sellers may distrust each other, and after the buyer is worried about the advance payment, the seller will not deliver the goods according to the contract requirements; The seller is also worried that the buyer will not pay after delivery or submission of shipping documents. Therefore, two banks are needed as guarantors of buyers and sellers, collecting payment documents on their behalf, and replacing commercial credit with bank credit. The instrument used by banks in this activity is the letter of credit.