A letter of credit is usually issued by a bank and it takes on the debt liability of the client. So if the customer defaults on the issued credit, the bank or issuing agent of the letter of credit is responsible for the debt and has to pay the creditor. That institution then goes after the customer. You, as creditor, eliminated the credit risk in this case.
Credit default is widespread throughout all industries. Whether a business concentrates on one way of reducing credit risk or uses all of them, it is important that the company determines its best chances of receiving full payment for its sales.