What is a Letter of Credit?

A Letter of Credit is a financial instrument issued by a bank on behalf of the buyer to the seller as a guarantee of payment for the goods or services. The bank acts as an intermediary to guarantee payment to the seller of goods or services. Buyers pay a fee to the bank for issuing the Letter of Credit and they also need to provide margin amount as collateral.

What is a Trade Credit Insurance Policy?

A Trade Credit Insurance Policy is a type of insurance policy that protects the Insured Business from Non—Payment of Invoices by insuring the Accounts Receivables. If the buyer does not make payments owed to the seller, either due to bankruptcy or delays payment beyond a specified period, the Trade Credit Insurance Policy will pay out a percentage of the Invoice Value to the seller.

What is the difference between Letter of Credit and Trade Credit Insurance Policy?

Following table summarises the difference between Letter of Credit and Trade Credit Insurance Policy:

Letter of CreditTrade Credit Insurance Policy
  • Letter of Credit is a Financial Instrument that guarantees payment
  • Credit Insurance Policy is an insurance policy which compensates the seller for the loss
  • Letter of Credit is a contract between the buyer and seller with the bank as an intermediary
  • Trade Credit Insurance Policy is a contract between the seller and the Trade Credit Insurance Company
  • Letter of Credit is used for Pre-Shipment Financing
  • Trade Credit Insurance is used for Post-Shipment Financing
  • Covers a single buyer and a single transaction

 

  • Can cover multiple buyers and multiple transactions