What is a financial document issued by a bank for an importer in which the bank guarantees payment?

A letter of credit is a crucial financial document in international trade, as it serves as a guarantee from a bank to an importer that payment will be made to the exporter, provided that the terms outlined in the letter are met. This document adds security to transactions by ensuring that the seller will receive payment as long as they fulfill their obligations, such as shipping the goods and providing the necessary documents proving shipment.

In international trade, where trust between parties is limited due to distance and differing legal systems, the letter of credit plays a vital role in facilitating smoother business transactions. It protects both the buyer and seller, as the importer is assured that funds will not be transferred until specific conditions are satisfied, while the exporter gains confidence that the bank will honor the payment once the obligations are met.

The other options listed serve different purposes: a promissory note is a written promise to pay a specified amount of money at a certain time; a bill of exchange is a written order directing one party to pay a fixed sum to another; and a commercial invoice is a document issued by the seller to the buyer detailing the goods sold and the amount due. While these documents are important in trade, they do not provide the specific guarantee of payment that a letter of credit does.