What is the purpose of a letter of credit?

A letter of credit is a financial instrument used in international trade to ensure that payment will be made to the seller upon fulfillment of specified conditions. It acts as a guarantee from the buyer's bank to the seller, mitigating the risk of non-payment. This mechanism helps facilitate trust between parties in different countries, as it provides security for both the buyer and the seller throughout the transaction process. Overall, it streamlines the payment process and enhances the reliability of cross-border transactions.