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Glossary Term: LETTER OF CREDIT

Definition(s) for LETTER OF CREDIT:


1. ) A document issued by a financial institution on behalf of a buyer stating the amount of credit the buyer has available, and that the institution will honor drafts up to that amount written by the buyer It gives the buyer the prestige and financial backing of the issuing institution and satisfies the requirements of the seller in completing the transaction The accepting institution has a prior agreement as to how the buyer will pay for the drafts as they are presented

2. ) A letter of credit is a document issued by a bank holding company or its consolidated subsidiaries (generally a banking subsidiary) on behalf of its customer (the account party) authorizing a third party (the beneficiary), or in special cases the account party, to draw drafts on the bank holding company or its consolidated subsidiary up to a stipulated amount and with specified terms and conditions. The letter of credit is a conditional commitment (except when prepaid by the account party) on the part of the consolidated bank holding company to provide payment on drafts drawn in accordance with the terms of the document.



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