An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letters of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a bank promise to pay the third party for the purchase of goods by the bank's customer. A standby letter of credit is a bank promise to pay the third party in the event of some defined failure by the bank's customer, usually, but not always, a failure to pay. Standby letters of credit are often used as credit enhancements for securities. American Banker Glossary
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A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues. Bloomberg Financial Dictionary
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letter of credit ˌletter of ˈcredit written abbreviation l/c noun letters of credit PLURALFORM [countable] FINANCE
1. in foreign trade, a written promise by an importer's bank to pay the exporter's bank on a particular date or at a particular time after the goods are sent by the exporter:
• Coffee buyers in Central America are required to have proof of financing, such as a letter of credit.
conˌfirmed ˌletter of ˈcredit FINANCE
a letter of credit that a bank promises to pay, even if the bank that made it available does not. This gives exporters more confidence that they will receive payment
irˌrevocable ˌletter of ˈcredit FINANCE
a letter of credit that the importer's bank cannot refuse to pay, even if, for example, the importer says there is a problem with the goods:
• The irrevocable letter of credit confirmed on a US bank surely saved us from a very bad debt situation.
ˌrevocable ˌletter of ˈcredit FINANCE
a letter of credit that the importer's bank can refuse to pay, if, for example, there is a problem with the goods
ˌstandby ˌletter of ˈcredit FINANCE
a written promise by a bank to pay a bill etc if the person or company that should pay fails to do so
2. when bonds are sold, a written promise by a bank that it will repay the bonds to lenders if the borrower is unable to repay them:
• The notes are backed by a letter of credit from Morgan Guaranty Trust Co.
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► See L/C.
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letter of credit UK US noun [C] (plural letters of credit) (ABBREVIATION L/C)
► FINANCE, COMMERCE a financial document in which a bank formally promises to pay a particular amount of money into the bank of a person selling goods if the goods are delivered by an agreed date and in an acceptable condition. Buyers often use letters of credit to buy goods from other countries: »
The bank issued the letter of credit on the instructions of the importer.
»For export sales, the price of the goods are secured by a letter of credit.
► FINANCE in a situation in which bonds, etc. are sold, a written promise by a bank to pay the lender if the borrower is unable to do so: »
The notes are secured by bank letters of credit.
→ See also CONFIRMED LETTER OF CREDIT(Cf. ↑confirmed letter of credit), DOCUMENTARY LETTER OF CREDIT(Cf. ↑documentary letter of credit), IRREVOCABLE LETTER OF CREDIT(Cf. ↑irrevocable letter of credit), CONFIRMED LETTER OF CREDIT(Cf. ↑confirmed letter of credit), STANDBY LETTER OF CREDIT(Cf. ↑standby letter of credit)
Financial and business terms. 2012.