What is a letter of credit? Why does an exporter need this document?
A letter of credit is a guarantee issued by the importer’s bank that it will honour payment up to a certain amount of export bills to the bank of the exporter. It is a document that contains an undertaking to honour the payment of bills issued by the exporter for the export of goods.
An exporter needs this document to be sure that there is no risk of non-payment. It helps minimise the risks associated with international transactions. Since it is the most appropriate and secured method of payment, it provides the exporter with the security that the bank will honour the payment obligations.
Explanation
The answer is derived directly from the provided context. The definition of a letter of credit is explicitly stated as a guarantee from the importer's bank to honour payment up to a certain amount. The need for the document is explained in the context as a measure to ensure there is no risk of non-payment and to secure international transactions.