Letters of credit

This overview is a guide to the Banking & Finance content within the letters of credit subtopic, with links to the appropriate materials.

The common feature of all letters of credit is an undertaking by a bank to pay the beneficiary of the letter of credit a specific sum within a specified time limit against the presentation of specific documents in accordance with the terms of the letter of credit.

Letters of credit can be either:

1. •

   commercial letters of credit (also known as traditional letters of credit or L/Cs), or

2. •

   standby letters of credit (also known as standby credits)

The purpose of a letter of credit determines which category it falls into:

1. •

   commercial letters of credit are used in relation to the movement of goods in the context of international or domestic trade as a method of payment under a contract of sale

2. •

   standby letters of credit are used in similar circumstances to on demand guarantees or performance bonds as a form of quasi-security

For more information, see Q&A: What is the difference between a standby letter of credit and a letter of credit?