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 ?
1) This allows the bank, dealing only in documents, to act quickly and ensure that the letter of credit will be honored without unnecessary delay.
Moreover, due to the increasing of the transaction costs and their complexity, letter of credit may actually become Non-Transferable through modifying the terms of the contract.
For the banks, however, with typically lower capital allocation re-quirementfor 'structured' facilities such as letters of credit over 'unstructured' overdrafts, not only might the banks be more willing to provide a letter of credit facility - it may be at a better price.
If all goes well, payment is made by the purchaser and the letter of credit simply expires.
IRS district offices have attempted to characterize letter of credit arrangements as payment under the installment sale rules.
While it is more efficient than a cash bond, a letter of credit will reduce the line of credit otherwise available to the customer of the issuing bank by the amount payable under the Letter of Credit.
Councilwoman Laura Chick said that while the city is trying to be a good neighbor by selling surplus power to the state, the DWP also needs to ``make sure the state puts in place a very concrete guarantee - a letter of credit or through other means'' to make sure the money is paid.
Whoever has the job of assembling the documentary evidence of the seller's performance will not necessarily know what the particular letter of credit requires, in terms of substance, mode of presentation, or timing.
Make sure your firm has a policy for negotiating letter of credit terms.
A letter of credit is attractive to insurance companies because it is not part of an insured's estate.
Moreover, in our experience, the advantages of a letter of credit versus an ordinary security deposit are often dissipated in the language of the letter of credit itself.
On the other hand, while an unconfirmed letter of credit is foreign-bank risk instead of foreign-customer risk, it's still foreign risk.