letter of credit

A letter of credit is an instrument issued by another at a person’s request, and agrees to honour a demand for payment by a third party. Letters of credit are usually issued by banks for their commercial customers to enable them to more readily enter into commercial contracts. They allow the third party to have a greater level of confidence in dealing with the customer, particularly when they do not have a prior commercial relationship. The customer usually draws cheques or other bills of exchange against the letter of credit.

Such letters usually have expiry dates, and may be made irrevocable. They may otherwise be revocable on notice by the issuer. The letter is usually subject to conditions. For instance, it may need to be presented with other documents, such as an invoice or certificate of title of some property.

Usage: The letter of credit was issued by the bank to guarantee payment for the construction work.

Related Words: instrument; bank guarantee; bill of exchange; cheque.