What is "letter of credit"

Credit \Cred"it\ (kr[e^]d"[i^]t), n. [F. cr['e]dit (cf. It. credito), L. creditum loan, prop. neut. of creditus, p. p. of credere to trust, loan, believe. See Creed.]

1. Reliance on the truth of something said or done; belief; faith; trust; confidence.

   When Jonathan and the people heard these words they gave no credit unto them, nor received them.
   --1 Macc. x. 46.

2. Reputation derived from the confidence of others; esteem; honor; good name; estimation.

   John Gilpin was a citizen Of credit and renown.
   --Cowper.

3. A ground of, or title to, belief or confidence; authority derived from character or reputation.

   The things which we properly believe, be only such as are received on the credit of divine testimony.
   --Hooker.

4. That which tends to procure, or add to, reputation or esteem; an honor.

   I published, because I was told I might please such as it was a credit to please.
   --Pope.

5. Influence derived from the good opinion, confidence, or favor of others; interest.

   Having credit enough with his master to provide for his own interest.
   --Clarendon.

6. (Com.) Trust given or received; expectation of future playment for property transferred, or of fulfillment or promises given; mercantile reputation entitling one to be trusted; -- applied to individuals, corporations, communities, or nations; as, to buy goods on credit.

   Credit is nothing but the expectation of money, within some limited time.
   --Locke.

7. The time given for payment for lands or goods sold on trust; as, a long credit or a short credit.

8. (Bookkeeping) The side of an account on which are entered all items reckoned as values received from the party or the category named at the head of the account; also, any one, or the sum, of these items; -- the opposite of debit; as, this sum is carried to one's credit, and that to his debit; A has several credits on the books of B. Bank credit, or Cash credit. See under Cash. Bill of credit. See under Bill. Letter of credit, a letter or notification addressed by a banker to his correspondent, informing him that the person named therein is entitled to draw a certain sum of money; when addressed to several different correspondents, or when the money can be drawn in fractional sums in several different places, it is called a circular letter of credit. Public credit.

   1. The reputation of, or general confidence in, the ability or readiness of a government to fulfill its pecuniary engagements.

   2. The ability and fidelity of merchants or others who owe largely in a community.

      He touched the dead corpse of Public Credit, and it sprung upon its feet.
      --D. Webster.

Letter \Let"ter\, n. [OE. lettre, F. lettre, OF. letre, fr. L. littera, litera, a letter; pl., an epistle, a writing, literature, fr. linere, litum, to besmear, to spread or rub over; because one of the earliest modes of writing was by graving the characters upon tablets smeared over or covered with wax. --Pliny, xiii. 1

1. See Liniment, and cf. Literal.] 1. A mark or character used as the representative of a sound, or of an articulation of the human organs of speech; a first element of written language.

   And a superscription also was written over him in letters of Greek, and Latin, and Hebrew.
   --Luke xxiii. 38.

2. A written or printed communication; a message expressed in intelligible characters on something adapted to conveyance, as paper, parchment, etc.; an epistle.

   The style of letters ought to be free, easy, and natural.
   --Walsh.

3. A writing; an inscription. [Obs.]

   None could expound what this letter meant.
   --Chaucer.

4. Verbal expression; literal statement or meaning; exact signification or requirement.

   We must observe the letter of the law, without doing violence to the reason of the law and the intention of the lawgiver.
   --Jer. Taylor.

   I broke the letter of it to keep the sense.
   --Tennyson.

5. (Print.) A single type; type, collectively; a style of type.

   Under these buildings . . . was the king's printing house, and that famous letter so much esteemed.
   --Evelyn.

6. pl. Learning; erudition; as, a man of letters.

7. pl. A letter; an epistle. [Obs.]
   --Chaucer.

8. (Teleg.) A telegram longer than an ordinary message sent at rates lower than the standard message rate in consideration of its being sent and delivered subject to priority in service of regular messages. Such telegrams are called by the Western Union Company day letters, or night letters according to the time of sending, and by The Postal Telegraph Company day lettergrams, or night lettergrams. Dead letter, Drop letter, etc. See under Dead, Drop, etc. Letter book, a book in which copies of letters are kept. Letter box, a box for the reception of letters to be mailed or delivered. Letter carrier, a person who carries letters; a postman; specif., an officer of the post office who carries letters to the persons to whom they are addressed, and collects letters to be mailed. Letter cutter, one who engraves letters or letter punches. Letter lock, a lock that can not be opened when fastened, unless certain movable lettered rings or disks forming a part of it are in such a position (indicated by a particular combination of the letters) as to permit the bolt to be withdrawn. A strange lock that opens with AMEN. --Beau. & Fl. Letter paper, paper for writing letters on; especially, a size of paper intermediate between note paper and foolscap. See Paper. Letter punch, a steel punch with a letter engraved on the end, used in making the matrices for type. Letters of administration (Law), the instrument by which an administrator or administratrix is authorized to administer the goods and estate of a deceased person. Letter of attorney, Letter of credit, etc. See under Attorney, Credit, etc. Letter of license, a paper by which creditors extend a debtor's time for paying his debts. Letters close or Letters clause (Eng. Law.), letters or writs directed to particular persons for particular purposes, and hence closed or sealed on the outside; -- distinguished from letters patent. --Burrill. Letters of orders (Eccl.), a document duly signed and sealed, by which a bishop makes it known that he has regularly ordained a certain person as priest, deacon, etc. Letters patent, Letters overt, or Letters open (Eng. Law), a writing executed and sealed, by which power and authority are granted to a person to do some act, or enjoy some right; as, letters patent under the seal of England. The common commercial patent is a derivative form of such a right. Letter-sheet envelope, a stamped sheet of letter paper issued by the government, prepared to be folded and sealed for transmission by mail without an envelope. Letters testamentary (Law), an instrument granted by the proper officer to an executor after probate of a will, authorizing him to act as executor. Letter writer.

   1. One who writes letters.

   2. A machine for copying letters.

   3. A book giving directions and forms for the writing of letters.

n. (context finance banking English) A document, used primarily in trade finance and issued generally by a financial institution, in which the institution promises to pay debts up to a certain limit to be acquired by the beneficiary against delivery of documents specified in the letter.

n. a document issued by a bank that guarantees the payment of a customer's draft; substitutes the bank's credit for the customer's credit

A letter of credit is a document, typically from a bank (Issuing Bank), assuring that a seller (Beneficiary) will receive payment up to the amount of the letter of credit, as long as certain documentary delivery conditions have been met. In the event that the buyer (Applicant) is unable to make payment on the purchase, the Beneficiary may make a demand for payment on the bank. The bank will examine the Beneficiary's demand and if it complies with the terms of the letter of credit, will honor the demand.

The letter of credit states what documents the Beneficiary must present, what information they must contain, and the place and date it expires. Beneficiaries who sell goods and utilize a letter of credit as the method of payment have the assurance of the issuing bank that if they present the documents stated in the letter of credit, the issuing bank will honor their demand for payment.

They are often used in international transactions to ensure that payment will be received where the buyer and seller may not know each other and are operating in different countries. In this case the seller is exposed to a number of risks such as credit risk, and legal risk caused by the distance, differing laws and difficulty in knowing each party personally. A letter of credit provides the seller with a guarantee that they will get paid as long as certain documentary delivery conditions have been met. For this reason the use of letters of credit has become a very important aspect of international trade.

The bank that writes the letter of credit will act on behalf of the buyer and make sure that all documentary conditions have been met before making the payment to the seller. Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs and Practice for Documentary Credits. The current version, UCP600, became effective July 1, 2007. Letters of credit are typically used by importing and exporting companies particularly for large purchases and will often negate the need by the buyer to pay a deposit before delivery is made.

They are also used in land development to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are the supplier, usually called the "beneficiary", "the issuing bank", of whom the buyer is a client, and sometimes an advising bank, of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without mutual consent of all parties.