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, 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 ?
The book begins with a useful explanation of why documentary credits are used in international business.
However, since documentary credits involve relatively higher banking fees and more complex documentary procedures, this option is not always appropriate.
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.
This article was first published in the Oct-Dec 2006 issue of DCInsight, a quarterly journal on Documentary Credits brought out by the International Chamber of Commerce which can be ordered at iccbooks.com.
Among these policies were the popular short-term trade credit and documentary credit policies, the foreign investment insurance policy; critical/strategic supplies (CAPEX) policy for supplies made by foreign companies into local projects of strategic nature; and XoL policy suitable for crude oil suppliers and aluminium smelters and other projects.
As part of the mid-year change, the government now requires a mandatory use by importers of documentary credit or letters of credit.
"It is important to understand if the presentation under a Documentary Credit is a fraudulent one aimed to abuse the banking system to siphon off money against a cargo which is non-existent.
The National Bank of Egypt (NBE) announced its cooperation with the electricity sector, providing banking advice and services in the form of documentary credit that require opening and letters of guarantee requiring issuance, to the NPPA.
Summary: Corporate executives, customers of the Banque ExtE[umlaut]rieure d'AlgE[umlaut]rie (External Bank of Algeria, BEA) on Monday expressed fears about the payment of imports through documentary credit (DC).
Fee and commission income from the documentary credit for the second quarter of 2009, amounting to $907,000, was 62 per cent more than the $558,000 earned in the first quarter of 2009.
Article 9 defines the nature of the commitment given by banks, and it is worth mentioning that the wording in the current revision of UCP is stronger than before in order, as the Preface to UCP500 says, to "enhance the integrity and reliability of the Documentary Credit undertaking."