Definition

Noun: A letter of credit is a formal, written document issued by a bank or financial institution. It guarantees that a seller will receive payment from a buyer, provided that the seller meets all the specific terms and conditions outlined in the document. It essentially substitutes the bank's creditworthiness for that of the buyer, reducing risk for the seller in a transaction, especially in international trade.

Usage Examples

• Noun:
  • The exporter required a letter of credit before shipping the goods to ensure payment.
  • To finalize the import deal, the buyer's bank issued an irrevocable letter of credit in favor of the seller.
  • The terms of the letter of credit stipulated that payment would be released upon presentation of the shipping documents.

Advanced Usage

• "Confirmed letter of credit": A letter of credit that is guaranteed by both the issuing bank and a second bank (usually in the seller's country), providing an extra layer of security for the seller.
  • The seller insisted on a confirmed letter of credit due to the political instability in the buyer's country.
• "Irrevocable letter of credit": A letter of credit that cannot be modified or canceled without the agreement of all parties involved (the buyer, seller, and issuing bank). This is the most secure and common type in commercial transactions.
  • An irrevocable letter of credit provides the exporter with a firm guarantee of payment.
• "Standby letter of credit": Functions more like a guarantee of payment; it is used as a backup payment method if the buyer fails to fulfill a contract.
  • The construction company provided a standby letter of credit as a performance bond for the project.

Variants and Related Words

• L/C: A common abbreviation for "letter of credit."
  • Please send the L/C by the end of the week to proceed with the order.
• Documentary Credit: Another term for a letter of credit, emphasizing that payment is contingent upon the presentation of specified documents.
• Issuing Bank: The bank that creates and guarantees the letter of credit at the buyer's request.
• Advising Bank: The bank (usually in the seller's country) that authenticates and forwards the letter of credit to the seller.

Synonyms

• Bank Guarantee: A broader term for a promise by a bank to cover a loss if a borrower defaults; a letter of credit is a specific type of bank guarantee for trade.
• Commercial Credit Instrument: A formal term for documents, including letters of credit, used to facilitate commerce and guarantee payments.

Related Phrases

• To open a letter of credit: The process by which a buyer applies to their bank to issue a letter of credit.
  • The importer will open a letter of credit with their local bank.
• To amend a letter of credit: To make changes to the terms of an existing letter of credit, which requires the consent of all parties.
  • We need to amend the letter of credit to correct the shipment date.
• To honor a letter of credit: When the issuing bank makes the payment to the seller because all terms have been satisfied.
  • The bank is obligated to honor the letter of credit upon presentation of compliant documents.

Noun

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