A commercial letter of credit (CLC) is a bank-issued document that ensures a supplier to a company gets paid for the goods and services it provides.
Your company may request a CLC from your bank when one of your suppliers is uncertain about your ability to pay. This can happen when:
- Your company is working with a new supplier that doesn’t want to offer trade credit (i.e., allow the purchase of goods or services without immediate payment).
- Your company is in start-up mode and doesn’t have enough credit history for a supplier to judge your ability to pay.
- Your company is dealing with a supplier outside its normal trading area or in another country.
To get a CLC for one of your suppliers, your company must apply to your bank just like a loan application. If approved, your bank will then issue the CLC in favour of your supplier. When the supplier provides goods and/or services to your company according to the criteria set out in the CLC by your banker, the bank will directly pay your supplier on your behalf. Because of this, a CLC is referred to as a “direct payment credit facility.” This is different from a letter of guarantee, where the bank will pay only if your company cannot.