letter of credit

letter of credit
= documentary credit
A letter from one banker to another authorizing the payment of a specified sum to the person named in the letter on certain specified conditions (see letter of indication). Commercially, letters of credit are widely used in the international import and export trade as a means of payment. In an export contract, the exporter may require the foreign importer to open a letter of credit at the importer's local bank (the issuing bank) for the amount of the goods. This will state that it is to be negotiable at a bank (the negotiating bank) in the exporter's country in favour of the exporter; often, the exporter (who is called the beneficiary of the credit) will give the name of the negotiating bank. On presentation of the shipping documents (which are listed in the letter of credit) the beneficiary will receive payment from the negotiating bank. An irrevocable letter of credit cannot be cancelled by the person who opens it or by the issuing bank without the beneficiary's consent, whereas a revocable letter of credit can. In a confirmed letter of credit the negotiating bank guarantees to pay the beneficiary, even if the issuing bank fails to honour its commitments (in an unconfirmed letter of credit this guarantee is not given). A confirmed irrevocable letter of credit therefore provides the most reliable means of being paid for exported goods. However, all letters of credit have an expiry date, after which they can only be negotiated by the consent of all the parties. A circular letter of credit is an instruction from a bank to its correspondent banks to pay the beneficiary a stated sum on presentation of a means of identification. It has now been replaced by traveller's chequesAlthough the term 'letter of credit' is still widely used, in 1983 the International Chamber of Commerce recommended documentary credit as the preferred term for these instruments.

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  • letter of credit — 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… …   Law dictionary

  • Letter of credit — Credit Cred it (kr[e^]d [i^]t), n. [F. cr[ e]dit (cf. It. credito), L. creditum loan, prop. neut. of creditus, p. p. of credere to trust, loan, believe. See {Creed}.] 1. Reliance on the truth of something said or done; belief; faith; trust;… …   The Collaborative International Dictionary of English

  • Letter of credit — Letter Let ter, n. [OE. lettre, F. lettre, OF. letre, fr. L. littera, litera, a letter; pl., an epistle, a writing, literature, fr. linere, litum, to besmear, to spread or rub over; because one of the earliest modes of writing was by graving the… …   The Collaborative International Dictionary of English

  • letter of credit — n. a letter from a bank asking that the holder of the letter be allowed to draw specified sums of money from other banks or agencies, to be charged to the account of the writer of the letter …   English World dictionary

  • letter of credit — n an official letter from a bank allowing a particular person to take money from another bank …   Dictionary of contemporary English

  • Letter of credit — After a contract is concluded between buyer and seller, buyer s bank supplies a letter of credit to seller …   Wikipedia

  • letter of credit — An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letters of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a bank… …   Financial and business terms

  • letter of credit — An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irrevocable …   Black's law dictionary

  • letter of credit — An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irrevocable …   Black's law dictionary

  • letter of credit — documentary credit A letter from one banker to another authorizing the payment of a specified sum to the person named in the letter on certain specified conditions. Commercially, letters of credit are widely used in the international import and… …   Accounting dictionary

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