In such a case, the bank will already have in place adequate security for its commitment. The bank's cost of issuing a letter of credit in this instance is minimal and, in any event, less than what the seller's cost would be in investigating the purchaser. Therefore, the parties shift the burden of litigating to the purchaser. Generally, the use of a letter of credit has the effect of shifting the forum of most litigation arising out of performance of the underlying contract to the place where the seller is located. For example, the seller can insist that the buyer obtain a dollar-denominated letter of credit confirmed by an American bank and thereby avoid the risk being paid in a foreign currency which may fluctuate in value.
Letters of credit have many uses in shifting credit risk and providing liquidity.
However, their versatility and prompt payment feature also make them an invaluable instrument for businesses expanding in the global marketplace.