A standard, commercial letter of credit (LC) is a document issued mostly by a financial institution

Financial institution

In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...

, used primarily in trade finance

Trade finance

Trade finance is related to international trade.While a seller can require the purchaser to prepay for goods shipped, the purchaser may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support...

, which usually provides an irrevocable payment undertaking.

The letter of credit can also be payment for a transaction, meaning that redeeming the letter of credit pays an exporter. Letters of credit are used primarily in international trade

International trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

 transactions of significant value, for deals between a supplier in one country and a customer in another.