Legal Definitions - time letter of credit

A time letter of credit is a financial instrument issued by a bank that guarantees payment to a seller (known as the beneficiary) on behalf of a buyer (the applicant), but with the crucial difference that payment is made at a specified future date, rather than immediately. It provides assurance to the seller that they will receive their money, while simultaneously allowing the buyer a period of time before the payment is actually due.

This type of letter of credit is particularly useful in transactions where the buyer needs time to receive, inspect, or process goods before payment, or where their cash flow requires a deferred payment schedule. The bank issuing the time letter of credit commits to paying the seller on the agreed future date, provided all the terms and conditions, typically involving the presentation of specific documents (like shipping manifests or inspection certificates), have been met.

Here are a few examples illustrating how a time letter of credit works:

• International Machinery Import:

  A manufacturing company in Brazil (the buyer) needs to import a specialized, high-value production line from a supplier in Germany (the seller). The Brazilian company wants to ensure the machinery arrives and passes initial inspection before payment is released, but the German supplier requires a bank guarantee. They agree on a 90-day payment term after shipment.

  The Brazilian company's bank issues a time letter of credit, promising to pay the German supplier 90 days after the supplier presents valid shipping documents proving the machinery has been dispatched. This arrangement gives the Brazilian company time to receive and verify the goods, while the German supplier has the security of a bank's commitment to pay on the future date, reducing their risk.

• Bulk Raw Material Purchase:

  A large textile mill in India (the buyer) regularly purchases vast quantities of raw cotton from a cooperative in Egypt (the seller). To manage its working capital, the textile mill prefers to pay 60 days after receiving the cotton. The Egyptian cooperative, however, wants a guarantee of payment before shipping such a large volume.

  The Indian textile mill arranges for its bank to issue a time letter of credit, payable in 60 days, to the Egyptian cooperative. Once the cooperative ships the cotton and provides the necessary documents (like bills of lading and quality certificates) to their bank, the Indian bank confirms the documents are in order. The bank then commits to paying the cooperative in 60 days, allowing the textile mill to process some of the cotton into fabric before the payment is due, while the cooperative is assured of payment by a bank.

• Custom Software Development:

  A government agency in Canada (the buyer) commissions a technology firm (the seller) to develop a complex, custom-built software system. The agency's procurement rules dictate that final payment can only be made 120 days after the software is fully installed, tested, and accepted. The technology firm, needing assurance for such a large project, requests a payment guarantee.

  The Canadian government agency's bank issues a time letter of credit to the technology firm, specifying payment in 120 days upon the firm's presentation of documents confirming successful installation, testing, and acceptance by the agency. This allows the technology firm to proceed with the project confidently, knowing that a bank will honor the payment on the agreed future date, accommodating the agency's specific payment timeline.