Letters of credit

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:

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

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

•
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
•
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?

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