Also known as a trade letter of credit or documentary letter of credit, a commercial letter of credit is typically used by a buyer of goods to pay the purchase price to the seller in the ordinary course of the international sale of goods. The buyer arranges for the issuing bank to issue the commercial letter of credit in favor of the seller (beneficiary). The seller, in turn, can draw on the letter of credit by delivering to the issuing bank (in most cases using its own bank) evidence that the goods have been shipped to the buyer (for example, a bill of lading from the carrier that evidences the purchased goods).

The expectation of all the parties is that the issuing bank will honor the commercial letter of credit when the seller delivers all the documents required by the letter of credit, even if the seller has not fully performed its obligations under the purchase agreement. When the issuing bank makes the payment to the seller, the buyer must reimburse the issuing bank for the amount paid, after which the buyer receives the documents necessary for it to take delivery of the goods at their point of arrival.

For more information on commercial letters of credit, see Practice Note, Commercial Letters of Credit.