Question

A letter of credit:

a. Ensures a company that funds will be available when needed
b. Is analogous to a credit card that companies can draw on as needed
c. Is a representation that a company has a high credit rating
d. Provides a guarantee of payment from the buyer, reducing the credit risk to the seller

Answer 1

d. Provides a guarantee of payment from the buyer, reducing the credit risk to the seller

Step-by-step explanation:

A letter of credit is a document that guarantees a seller of payment from the buyer. It is drafted and issued by a bank assuring the seller of timely and full payment. A letter of credit is applied mostly in international trade where the buyer and seller hardly meet or know each other.

Banks issue a letter a credit against cash or other securities. Should the buyers fail to make payment, a letter of credit assures the seller that the bank will take responsibility for the payment. Banks usually charge a fee for issuing letters of credit.