letter of credit

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Letter of Credit

A written instrument from a bank or merchant in one location that requests that anyone or a specifically named party advance money or items on credit to the party holding or named in the document.

When a letter of credit is used, repayment of the debt is guaranteed by the bank or merchant issuing it. For example, if a bank is aware that a prominent citizen is trustworthy and can safely be relied upon to settle the debts which he or she incurs, then a letter of credit will be offered to that person on the basis of his or her good reputation so the person can travel without carrying large sums of money.

Letters of credit were used frequently before credit cards and travelers' checks were in common usage.

letter of credit

n. a document issued by a bank guaranteeing to provide a customer a line of credit (automatic loan up to a certain amount) for money or security for a loan. Such a letter is used primarily to facilitate long-distance business transactions.

letter of credit

noun credit account, credit note, guaranty, negotiable instrument, paper credit, security
Associated concepts: financial guarantee, letter of delegaaion, letter of exchange, letter of introduction, letter of liiense, letters testamentary
See also: draft

LETTER OF CREDIT, contracts. An open or sealed letter, from a merchant in one place, directed to another, in another place or country, requiring him that if a person therein named, or the bearer of the letter, shall have occasion to buy commodities, or to want money to any particular or unlimited amount, either to procure the same, or to pass his promise, bill, or other engagement for it, the writer of the letter undertaking to provide him the money for the goods, or to repay him by exchange, or to give him such satisfaction as he shall require, either for himself or the bearer of the letter. 3 Chit Com. Law, 336; and see 4 Chit. Com. Law, 259, for a form of such letter.
     2. These letters are either general or special; the former is directed to the writer's friends or correspondents generally, where the bearer of the letter may happen to go; the latter is directed to some particular person. When the letter is presented to the person to whom it is addressed, he either agrees to comply with the request, in which case he immediately becomes bound to fulfill all the engagements therein mentioned; or he refuses in which case the bearer should return it to the giver without any other proceeding, unless, indeed, the merchant to whom the letter is directed is a debtor of the merchant who gave the letter, in which case he should procure the letter to be protested. 3 Chit. Com. Law, 337; Mal., 76; 1 Beawes. 607; Hall's Adm. Pr. 14; 4 Ohio R. 197; 1 Wilc. R. 510.
     3. The debt which arises on such letter, in its simplest form, when complied with, is between the mandator and the mandant; though it may be so conceived as to raise a debt also against the person who is supplied by the mandatory. 1. When the letter is purchased with money by the person wishing for the foreign credit; or, is granted in consequence of a check on his cash account, or procured on the credit of securities lodged with the person who granted it; or in payment of money due by him to the payee; the letter is, in its effects, similar to a bill of exchange drawn on the foreign merchant. The payment of the money by the person on whom the letter is granted raises a debt, or goes into account between him and the writer of the letter; but raises no debt to the person who pays on the letter, against him to whom the money is paid. 2. When not so purchased, but truly an accommodation, and meant to raise a debt on the person accommodated, the engagement, generally is, to see paid any advances made to him, or to guaranty any draft accepted or bill discounted and the compliance with the mandate, in such case, raises a debt, both against the writer of the letter, and against the person accredited. 1 Bell's Com. 371, 6th ed. The bearer of the letter of credit is not considered bound to receive the money; he may use the letter as he pleases, and he contracts an obligation only by receiving the money. Poth. Contr. de Change, 237.

References in periodicals archive ?
O'Brien said: "The 2013 ISBP is an essential tool for day-to-day documentary credit operations, not only of importance to bankers but also to trading companies" he said.
HSBC (NYSE: HBC) India has issued the first RMB documentary credit in India for a Mumbai-based pharmaceutical company.
As such, an L/C will remain an off-balance sheet exposure until the documents are presented and honoured by the bank, usually in accordance with the provisions of a standardised code of practice, the ICC Uniform Customs and Practice for Documentary Credits (UCP 600).
Through these instruments of payment, this public bank plans to propose to importers deferred documentary credits for deadlines ranging from 30, 90 and 180 days and even to one year.
The text, a part of the Short Course in International Trade Series, is a brisk primer on documentary credits for practitioners under pressure to learn quickly the basics of this highly regulated form of payment.
Customer service staff must be knowledgable about documentary credits and requirements specific to the country, such as consular requirements, pre-shipment inspection, import licenses, other inspections, and any U.
Credit facilities are loans granted by banks to their customers, along with documentary credits and letters of guarantee that they establish to cover import operations.
For his part, the Deputy Chairman of the Prinx Company for the Middle East and Africa Michel Costinet said that their company was one of the largest US companies operating in the provision of services, opening of documentary credits and preparation of financial, feasibility and environmental studies in addition to their work in the insurance and transfer of money, gold and precious minerals, revealing that their company has branches in more than 70 countries around the world.
His experience spans many banking functions, including structured trade finance, documentary credits, operations, loan administration and agency, treasury, marketing, and business development.
He added the Bahraini Al-Baraka bank opens documentary credits for the Sudanese pilgrims besides issuing financial instruments which benefit public and private companies and being used in inter-regional trade.
It will extend the reach of ICC banking rules and related services including ICC rules and guidelines on documentary credits, UCP 600 -- the most successful privately drafted rules for trade ever developed -- and forthcoming Bank Payment Obligation rules on supply chain finance.