letter of credit

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Letter of credit (LOC)

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.

Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

letter of credit

A promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default.

letter of credit

a document used to effect payment for internationally traded goods, usually as part of a contract for the sale of goods which ensures that the supplier receives prompt and guaranteed payment while the purchaser obtains a short-term CREDIT line. In brief, under this facility, a purchaser in country A of goods supplied by a firm in country B can arrange a letter of credit from his bank (the credit issuing bank) authorizing it to make payment to the supplier either through a branch of the bank in country B or, more usually, through a bank (the negotiating bank) holding the supplier's account. Under a contract of sale of goods this will be done on the presentation to the negotiating bank of documents stipulated in the letter of credit, such as the bill of lading, insurance policy, certificate of origin, etc. In the case of certain letters of credit relating to particular transactions and customers located in heavily indebted countries, a secondary market has developed to offset political as well as commercial risk. See EXPORTING.

letter of credit (LOC)

(Pronounce each letter of the abbreviation;it is not pronounced as a word.) An instrument issued by a bank or other financial institution (issuer) agreeing that it will pay money to another (beneficiary), on behalf of the bank's customer (account party), upon the happening of certain named events.There is usually an issuance fee of 1 to 2 percent of the face amount of the LOC.Modern banking regulations require the same underwriting as for a commercial loan.The LOC will set out the exact prerequisites to be met before the bank will issue payment. These usually include a particular time and place to present the original letter of credit and the exact documents that must accompany the letter.Some states still follow the old “strict compliance”rule holding that any deviation from the instructions, no matter how minor, will justify the bank in refusing to pay. Others follow a “substantial compliance” rule, so that minor typographical or syntax errors in the presenting documents will not justify nonpayment. See also the two types of letters of credit: documentary letter of credit and standby letter of credit.

References in periodicals archive ?
O'Brien said: "The 2013 ISBP is an essential tool for day-to-day documentary credit operations, not only of importance to bankers but also to trading companies" he said.
HSBC (NYSE: HBC) India has issued the first RMB documentary credit in India for a Mumbai-based pharmaceutical company.
Documentary credit or D/C (also known as a letter of creditor L/C) - After cash in advance, this is usually considered the next safest method for the exporter.
Through these instruments of payment, this public bank plans to propose to importers deferred documentary credits for deadlines ranging from 30, 90 and 180 days and even to one year.
The text, a part of the Short Course in International Trade Series, is a brisk primer on documentary credits for practitioners under pressure to learn quickly the basics of this highly regulated form of payment.
Customer service staff must be knowledgable about documentary credits and requirements specific to the country, such as consular requirements, pre-shipment inspection, import licenses, other inspections, and any U.S.
The situation has brought about two immediate effects: more time is needed to process documentary trade instruments like LCs within the already-limited timelines set out in the Uniform Customs and Practice for Documentary Credits (UCP) rules, and a potential reluctance to work with certain counterparts, such as gaming industry companies, or with correspondent banks in certain countries, including some of those located in the Caribbean, South America or Switzerland.
In Transaction Banking, UniCredit will provide documentary credits (import and export letter of credit), documentary collections, guarantees, cash management services and the availability of an advanced eBanking platform.
For his part, the Deputy Chairman of the Prinx Company for the Middle East and Africa Michel Costinet said that their company was one of the largest US companies operating in the provision of services, opening of documentary credits and preparation of financial, feasibility and environmental studies in addition to their work in the insurance and transfer of money, gold and precious minerals, revealing that their company has branches in more than 70 countries around the world.
He added the Bahraini Al-Baraka bank opens documentary credits for the Sudanese pilgrims besides issuing financial instruments which benefit public and private companies and being used in inter-regional trade.
It will extend the reach of ICC banking rules and related services including ICC rules and guidelines on documentary credits, UCP 600 -- the most successful privately drafted rules for trade ever developed -- and forthcoming Bank Payment Obligation rules on supply chain finance.