letter of credit

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Related to letters of credit: Standby Letters of Credit

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 ?
Sberbank leads the domestic letters of credit market according to the rating agency Expert RA3 (February 2015).
Section 5-116 of the Codex and Article 46 of the Uniform Regulation of letters of credit has restricted the transferring the right of letter of credit setting.
The rejection of Greek letters of credit may demonstrate a complete lack of faith in the ability of Greek banks to back the credit of Greek businesses like Manesiotis'.
The UK importer may argue that the raising of letters of credit requires bank facilities which are more difficult to secure.
LCconnect, an online portal for letters of credit utilizing Internet technology to develop a more efficient workflow solution for the letter of credit industry, was founded in January 2000 by Lukasz Cianciara and Michael Moretti, two veterans of the banking industry.
Letters of Credit for domestic use are typically clean with a statement that the issuing bank is not required to inquire whether or not the beneficiary of the Letter of Credit has the right to the amount claimed as between it and the bank's customer.
Surveys suggest that letters of credit are often rejected because of errors in preparation.
Since 1980, the National Association of Insurance Commissioners (NAIC) has required that letters of credit be irrevocable to be fully admissible on the insurer's balance sheet.
Nowadays most landlords, unwilling to risk losing a large tenant, have little choice but to accept letters of credit rather than cash as security for a lease," he says.
To cut the number of discrepant letters of credit, the pro-forma invoice submitted to the customer before it opens a letter of credit should have the same format as the one used for the customer's invoice.
This ruling is significant because it sets forth, for the first time, the IRS's position on the treatment of letters of credit securing compensatory promises.
To grasp the controversy surrounding this situation and its strategic implications, three legal principles governing letters of credit are described below: the independence principle, the strict compliance principle, and fraud in the transaction.