Letter Of Credit

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What is a 'Letter Of Credit'

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

BREAKING DOWN 'Letter Of Credit'

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

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RELATED FAQS
  1. What is a bank's legal liability when issuing a letter of credit?

    Learn the responsibility of banks that issue letters of credit Letters of credits ensure payment on transactions between ... Read Answer >>
  2. What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Answer >>
  3. Can entities other than banks issue letters of credit?

    Obtaining a letter of credit from a non-bank is legally acceptable according to the ICC, but companies tend to prefer to ... Read Answer >>
  4. What content does a letter intent have to have?

    Review some of the standard language that ought to be included in a letter of intent between two parties in a business transaction. Read Answer >>
  5. How legally binding is a letter of intent?

    Find out when a letter of intent is binding and when it is not. Understand the roles of drafting language, relationships ... Read Answer >>
  6. What are the different ways I can file my income tax return?

    Learn about the potential consequences of violating the terms of a letter of intent, such as breakup fees, damages and agreement ... Read Answer >>
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