Letter of credit
A promise document issued by a bank or another issuer to a third party to make a payment on behalf of a customer in accordance with specified conditions.
Letters of credit are frequently used in international trade to make funds available in a foreign location.
Letter of credit contrasted with documentary collection
Letters of credit are often contrasted, from the perspective of a seller, with an alternative structure of documentary collections.
A letter of credit is a direct obligation of a bank to pay (against specified documents).
A documentary collection means a bank collecting payment from the buyer (by presenting documents to the buyer).
A letter of credit therefore gives superior protection to the seller against credit risk or delayed cash flow, or both.
For this reason letters of credit are more expensive to arrange.
- Advising bank
- Bank payment obligation
- Clean letter of credit
- Commercial risk
- Confirmed letter of credit
- Confirming bank
- Documentary collection
- Documentary credit
- Irrevocable letter of credit
- Issuing bank
- LOC backed
- Standby letter of credit
- Trade finance
- Uniform Customs and Practice for Documentary Credits