letter of credit

Also found in: Dictionary, Thesaurus, Medical, Legal, Acronyms, Encyclopedia, Wikipedia.

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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
3--Pursuant to section 5-116, the principle governing the assignment of transfer right of the letter of credit is called "transferability" and the principle governing the assignment of the right of receiving the revenues of letter of credit is called "assignability ".
Where the UK company is an importer, it may find that whereas in the past its suppliers were prepared to deal on an open account basis they are now being asked to provide more secure instruments such as a letter of credit for the very same reasons as those mentioned above.
* A "trade letter of credit" is the equivalent of a check.
The foreign source's bank and your bank will agree to remitting the monies due when specific documents have been received, examined and satisfy the conditions of the letter of credit.
John Waxlax, president of GMAC Commercial Finance's Commercial Services division, said that this year, his firm expects to see import factoring growth driven in part by letter of credit elimination.
The fraud rule allows the issuer of a letter of credit or a court to disrupt the payment of a letter of credit when fraud is involved.
Accrual taxpayers normally cannot defer income with a letter of credit since the receipt of a note is taxable regardless of the collateral arrangement.
Stand by Letter of Credit in Lieu of Termination Liability Payments
"Why don't we just get a Letter of Credit?" In today's global marketplace, businesses are increasingly relying on letters of credit to secure performance of future contract obligations.
Absent specific provisions to the contrary (which would be unusual in the context of a typical commercial lease transaction), a security deposit, whether in the form of cash or the proceeds of a letter of credit, is not liquidated damages for a tenant's default under a lease, nor is it subject to an informal pre-judgment writ of attachment to secure payment of a future judgment.
Cuban Central Bank President Francisco Soberon said that accepting the letter of credit implies the recognition of debt, and, should the debt not be honored by its due date, the creditor could then begin court proceedings.
Common justifications for the use of the letter of credit fail to explain its widespread use.