What is a Letter of Credit (LC) commonly used for?

A Letter of Credit (LC) is primarily used in international trade as a guarantee from a bank on behalf of a buyer that payment will be made to a seller, provided that the seller meets the requirements established in the Letter of Credit. This instrument is crucial for international transactions because it mitigates the risk of non-payment for the seller and assures the buyer that the payment will be made only when certain negotiated conditions are fulfilled, such as delivering specific goods or services.

In the context of international payments, Letters of Credit facilitate trade between parties in different countries, offering protection and assurance regarding payment and delivery. This is especially important as it lowers the risk of currency fluctuations and helps ensure compliance with shipping and import/export regulations.

The other options do not accurately represent the primary functions of a Letter of Credit. Domestic payments are typically managed through different means, and cash discounts or employee salaries fall outside the scope of what an LC is intended to support. Therefore, focusing on international payments highlights the core purpose and utility of a Letter of Credit in the context of global commerce.