letter of credit

letter of credit   n.   pl. letters of credit Abbr. L/C A letter issued by a bank authorizing the bearer to draw a stated amount of money from the issuing bank, its branches, or other associated banks or agencies.

Letter of Credit

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase the bank will be required to cover the full or remaining amount of the purchase.

Investopedia Commentary

Often used in international transactions to ensure that payment will be received. Due to the nature of internation dealings such as distance, differing laws in each country, and difficulty in knowing each party personally the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) where the supplier will not be paid until the supplier confirms to the bank that the goods have been shipped.

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See also: Irrevocable Letter of Credit, Sight Letter of Credit, Standby Letter of Credit, Trade Finance

Also spelled: L/CLC

letter of credit

A promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default.

Main Entry: letter of credit
: a document issued to a beneficiary at the request of the issuer's customer in which the issuer (as a bank) promises to honor a demand for payment by the beneficiary in order to satisfy or secure the customer's debt —compare GUARANTY
NOTE: A letter of credit is usually requested by a buyer of merchandise (the issuer's customer) to be issued to the seller (the beneficiary) in order to secure the payment for the merchandise. In effect the letter of credit is considered to extend a line of credit or substitute the issuer's credit for the customer's.

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commercial letter of credit
: a letter of credit which is used to satisfy payment for merchandise and which usually requires the beneficiary to present a draft and some documentary proof (as of shipment or receipt of the merchandise) when making a demand for payment

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irrevocable letter of credit
: a letter of credit which the issuer cannot revoke or modify without the consent of the issuer's customer or the beneficiary

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stand·by letter of credit
: a letter of credit which is used to secure payment in case of default by the issuer's customer and which requires the beneficiary to present some documentary proof of such default when making a demand for payment

letter of credit

order from a bank to a bank or other party abroad authorizing payment of money (up to a specified limit) to a person named in the letter. A letter of credit, unlike a bill of exchange (q.v.), is not negotiable but is cashable only by the paying bank

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