It basically is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. During this event when the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Due to this nature of international dealings, that includes factors like distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has gotten into a very important aspect of international trade.