term:

Letter Of Credit

letter of credit

:a document issued to a beneficiary at the request of the issuer's customer in which the issuer (as a bank) promises to honor a demand for payment by the beneficiary in order to satisfy or secure the customer's debt compare guaranty NOTE: A letter of credit is usu. requested by a buyer of merchandise (the issuer's customer) to be issued to the seller (the beneficiary) in order to secure the payment for the merchandise. In effect the letter of credit is considered to extend a line of credit or substitute the issuer's credit for the customer's.

commercial letter of credit
: a letter of credit which is used to satisfy payment for merchandise and which usually requires the beneficiary to present a draft and some documentary proof (as of shipment or receipt of the merchandise) when making a demand for payment

irrevocable letter of credit
: a letter of credit which the issuer cannot revoke or modify without the consent of the issuer's customer or the beneficiary

stand·by letter of credit
: a letter of credit which is used to secure payment in case of default by the issuer's customer and which requires the beneficiary to present some documentary proof of such default when making a demand for payment

Source: Merriam-Webster's Dictionary of Law ©1996. Merriam-Webster, Incorporated. Published under license with Merriam-Webster, Incorporated.