letter of credit

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Related to letters of credit: Standby 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 ?
The key benefit of the letters of credit is that it ties all the terms and conditions that trigger the release of the payment into one instrument, said OBrien, adding that the seminar provided several practical cases and examples to explain the key functions of these letters.
Obviously, detailed knowledge of these rules can prevent fraud in letters of credit and business development.
Letters of Credit were fundamental to the development of international trade at the end of the Middle Ages.
Letters of Credit for domestic use are typically clean with a statement that the issuing bank is not required to inquire whether or not the beneficiary of the Letter of Credit has the right to the amount claimed as between it and the bank's customer.
Given these empirical findings, it is difficult to believe that the persistent use of letters of credit in commercial transactions has anything to do with their theoretical potential to ensure that the seller actually gets paid.
Surveys suggest that letters of credit are often rejected because of errors in preparation.
Many of the governing documents for letters of credit include cross collateral language.
To cut the number of discrepant letters of credit, the pro-forma invoice submitted to the customer before it opens a letter of credit should have the same format as the one used for the customer's invoice.
This ruling is significant because it sets forth, for the first time, the IRS's position on the treatment of letters of credit securing compensatory promises.
However, international letters of credit are not without risk and require careful management.
This month's column discusses a recent consensus reached by the Financial Accounting Standards Board emerging issues task force (EITF or task force) concerning letters of credit issued in conjunction with a sale-leaseback transaction.
The focus then shifts to the obligations of the various players (Chapter 2), letters of credit with attention paid to the sources of letter of credit law and practice (Chapter 3), the procedural aspects of LC rules and laws (Chapter 4), the standard by which compliance is to be determined (Chapter 5), and the LC fraud exception to the independence principle (Chapter 6).