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LSDefine
Simple English definitions for legal terms
letter of credit
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A quick definition of letter of credit:
A letter of credit is like a special note from a bank that says you can take out a certain amount of money. You can use this note at the bank or other places that the bank works with. It's not the same as having an account with the bank.
A more thorough explanation:
A letter of credit is a document issued by a bank that allows the holder to withdraw a specific amount of money from the bank or its associated branches or agencies. It is not considered an account in the law of secured transactions.
Let's say a company in the United States wants to purchase goods from a supplier in China. The supplier may require a letter of credit from the buyer's bank to ensure payment. The buyer's bank issues the letter of credit, which guarantees payment to the supplier once the goods are delivered.
Another example could be a student studying abroad who needs to show proof of financial support to obtain a student visa. The student's parent could obtain a letter of credit from their bank to show that they have the necessary funds to support their child's education.
These examples illustrate how a letter of credit can be used to provide assurance of payment or financial support in various situations.