Letter of credit is an undertaking issued by the bank by order of the buyer to effect a payment in favor of the seller under a condition that bank receives Letter of Credit conforming documents evidencing that the seller has fulfilled his contractual obligations.

 Letter of credit can be used in the following cases:

• when the business relations between the parties are newly established;
• when the parties have certain concerns about each other or about political and economical situation in the partner's country;
• when contract involves large-scale /long-term projects;
• when the parties require additional guarantee for delivery of goods and payment.

Main advantages when using Letter of credit are as follows:

For the buyer:

• the payment is effected only for the goods indicated in the letter of credit and only when all terms of delivery are fulfilled;
• assurance in the case of partial shipment, that payment will be effected only for the goods delivered;
• assurance in case a deal is failed, that the buyer will get his funds back after the letter of credit has expired.

For the seller:

• the payment for goods is guaranteed by the bank, not partner;
• assurance, that the seller will receive a specified sum of money within the specified period of time if the documents are presented to the bank in strict compliance with the terms and conditions of the Letter of credit.

The following forms of Letters of credit are widely used in the common banking practice:

• irrevocable letter of credit, which can not be amended or cancelled without the agreement of the seller;

• irrevocable confirmed letter of credit, which has a very high degree of security for the seller, when the seller's bank or any 3rd bank upon request of the issuing bank, assumes undertaking, in addition to that of the issuing bank, to effect payment under letter of credit provided that the presented documents are complied with the terms and conditions of the letter of credit. Irrevocable confirmed letter of credit is advisable when the seller has any doubts regarding the obligations of the Buyer's bank.

• transferable letter of credit, which is used in the intermediary trade operations. Transferable letter of credit allows the intermediary to request the bank to transfer the letter of credit in part to the supplier (producer) of goods, thus making it possible to receive his commission at minimum expenses with the limited amount of the own financial resources used.

• Standby letter of credit, which is used in order to secure fulfillment of the contractual obligations. Standby letter of credit has a function similar to guarantee, e.g. it is utilized only when contractual obligations are not fulfilled.