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 ?
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.
The conflict of laws in documentary credit transactions
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.
The law provides them with an enormous added safety net with the backing of documentary credit guaranteeing payment, hence avoiding risks and defaults.
Speakers were: Vincent O Brien, a member of the ICC Banking Commission and ICC and Chair of the ICC Market Intelligence Group (MIG); and Khalil Matar a Certified Documentary Credit Specialist, a Certified Internal Auditor, and the seminar was attended by trade professionals, experts in documentary credit, sales and purchasing managers and trade consultants, bankers and others.
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).
This manual covers each step of import operations from documentary credit opening / amendment, WEB documentary credit opening / amendment, documents scrutiny, lodgments, issuance of shipping guarantee/delivery order, retirement, acceptance, issuance of trust receipt, reversal of acceptance, dispatch, correspondence, reporting and control of all import related operations in accordance to the banks policies.
Utilization of funds under investment credit should be in accordance with the timetable and terms of payment under a contract for the implementation of projects entered into by the Company, through documentary credit opened in favor of the contractor.
The four new sub-branches offer extensive Renminbi and foreign currency banking services, including account and deposit services, loans and advances, bill acceptance and discounting, documentary credit and bank guarantees, remittance and settlement, foreign exchange, derivative products, debit cards, and credit cards.
Some of these programmes include Credit Card Management (CCM) - Certification with Hong Kong Institute of Bankers (HKIB); Certified Documentary Credit Specialist (CDCS) - Certification with the British Institute of Financial Services; ACCA Certification with the Association of Chartered Certified Accountants and others.