What is the purpose of a letter of credit?

The purpose of a letter of credit is to guarantee payment to a seller on behalf of a buyer under specific conditions. This financial instrument is commonly used in international trade to mitigate the risk that the buyer will not fulfill their payment obligations. By utilizing a letter of credit, a buyer's bank takes on the obligation to pay the seller as long as the seller meets the conditions outlined in the letter. This provides assurance to the seller that they will receive payment, which allows for smoother transactions and builds trust between parties who may not have an established relationship. The structured guarantee helps facilitate trade, especially across borders where regulations and trust may vary significantly.

The other options do not accurately reflect the function of a letter of credit as they pertain to different aspects of financial operations. For instance, facilitating high-interest loans pertains to lending practices, unlimited withdrawals from savings accounts pertain to banking account features, and credit card offers relate to consumer credit products. These functionalities do not capture the essence of the letter of credit, which is fundamentally focused on assurance in payments for goods or services under negotiated terms.