|Letters of credit are used for the following reasons:
To protect against
protect against country risk.
The buyer may be willing and able to pay; but economic or political conditions in the buyer's country may prevent or delay payment. This is a real concern when dealing with less developed countries and/or countries with foreign exchange shortages. To protect against these risks, a confirmed letter of credit will be necessary - a bank in the seller's country will (for a fee) add its own payment undertaking to that of the Issuing bank.
|Letters of credit are also used as part of exchange control or import control regimes operating in the buyer's country. In such cases the use of a letter of credit is mandatory, even if not required by the seller for security reasons.