letter of credit meaning

  "letter of credit" in a sentence
  • Noun: letter of credit
    1. A document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's credit for the customer's credit

    Derived forms: letters of credit

    Type of: credit, document

    Encyclopedia: Letter of credit

  • [Business]
    noun [C] (abbr l.c., L/C)


    (Finance ; Trade )

    a letter that a bank prepares for a customer in which it agrees to pay sb an amount of money under particular circumstances, used especially as a way of paying for imported goods:

    The importer asks the bank to issue a letter of credit on his behalf.


  • [Economics]
    = 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 It has now been replaced by traveller's cheques.

    Although 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.

  • [Finance]
    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.

  • [Law]
    A document whereby a bank, at the request of a customer, undertakes to pay money to a third party (the beneficiary) on presentation of documents specified in the letter (e.g.bills of lading and policies of insurance). The obligation of the bank to pay is independent of the underlying contract of sale and so is not affected by any defects in the goods supplied under the contract of sale. A contract of sale of goods may require the buyer to open an irrevocable letter of credit in favour of the seller. This cannot be revoked by the issuing bank or the purchaser of the goods before its expiry date, without the consent of the beneficiary. A confirmed letter of credit is one in which the negotiating bank guarantees payment to the beneficiary should it not be honoured by the issuing bank.


    More:   Next
  1. letter of credit belongs to banker's credit.
  2. the letter of credit expired.
  3. we insisted on payment by a confirmed, irrevocable letter of credit.
  4. it is the bank's responsibility to examine the documents in relation to the letter of credit issued.
  5. the bank's responsibility is to verify that the explorer's documents conform to the letter of credit.

Related Words

  1. letter of assist meaning
  2. letter of attorney meaning
  3. letter of comfort meaning
  4. letter of comment meaning
  5. letter of credence meaning
  6. letter of credit (loc) meaning
  7. letter of engagement meaning
  8. letter of guarantee meaning
  9. letter of hypothecation meaning
  10. letter of identification meaning
PC Version