A letter of credit (LC) that represents a guarantee by an issuing bank rather than a source for payment. A bank issues a standby letter of credit on behalf of its customer to provide assurances of payment to the seller in the event the buyer is unwilling or unable to pay for goods and/ or services as set out in the terms and conditions. Therefore, if payments are made as agreed, after the goods and bills have been shipped by the seller, the letter of credit will not be drawn on. If the customer defaults on payment, the seller presents a draft and copies of invoices to the issuing bank for payment.

Letters of credit are generally classified as standby letters of credit and documentary letters of credit.

The standby letter of credit is also known as a domestic letter of credit.