letter of credit

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Related to Commercial letters of credit: Revocable letter of credit, Irrevocable Letters of Credit

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 ?
While the difference between dependent and independent undertakings is apparent for commercial letters of credit, it isn't for standbys and independent guarantees.
5 million in financing from a sale and leaseback arrangement with a real estate investment trust involving 45 of the Company's restaurants and (3) a $30 million three year revolving credit facility of which up to $20 million will be available to support commercial letters of credit with the remainder available to provide working capital and for other corporate needs.
Approximately $11 million of the senior credit facility will be used to support commercial letters of credit, and the remainder will be available to provide working capital and for other corporate purposes.
The BizCurrency TradeEnabler is designed to facilitate a wide range of import and export trade finance transactions, including commercial letters of credit, standby letters of credit, amendments, bills and documentary collections.
Using TradeCard, Dime's business customers will be able to initiate, conduct and settle international trade transactions online, 24 hours a day, seven days a week, without using the traditional and more costly paper-based vehicle of commercial letters of credit.

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