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 ?
The seminar showed participants how to structure letters of credit transactions and how to apply the international letters of credit rules which are known as Uniform Customs & Practice for Documentary Credits (UCP 600) issued by the International Chamber of Commerce, he added.
The present paper tries to explain the differences, express their features and characteristics and finally compare existing regulations in guaranteed letters of credits and UCC.
Needless to say, banks in most cases will be secured by acceptable collateral from their customer for the full-face amount of the Letters of Credit outstanding at any time.
The account that I propose begins by identifying and contemplating the consequences of a likely disjunction in the locus within the firm (particularly the seller's firm) of the agency costs generated in the issuance of letters of credit, on the one hand, and in the performance of the conditions required before the seller is entitled to draw on the letter of credit on the other.
Letters of credit are safe against commercial risks if irrevocable, and against political risks if confirmed.
Several years ago, the FDIC and the Federal Reserve Board issued regulations for banks issuing letters of credit.
Banks make good money by confirming letters of credit for correspondent banks in low-risk countries.
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.
Chemical Bank ("Foreign Venture"), dealt with this precise scenario--where the beneficiary drew on two letters of credit for its unpaid claim and most of the amount demanded on a preference claim arising under Australia's bankruptcy law against the beneficiary.
A new product has been added to Sberbank s line of trade finance and documentary business services Russian unsecured letters of credit with advance payment.
Now the REIT is hacked by two letters of credit facilities," Young explained.
Using Letters of Credit needs the recipient bank to bear some credit risk, which foreign banks are reluctant to do when dealing with a transfer from a Myanmar banking counterpart.