LETTER OF CREDIT Meaning and
Definition
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A letter of credit refers to a financial document, typically issued by a bank or financial institution, that guarantees payment to a beneficiary on behalf of the buyer or applicant. It serves as a form of payment assurance, often used in international trade transactions, where a buyer wants to ensure that the seller receives payment upon fulfilling certain terms and conditions outlined in the agreement.
The letter of credit acts as a contractual agreement between the buyer, seller, and the issuing bank. It outlines the specific terms and conditions that must be met for the payment to be released. These terms typically relate to the quality and quantity of goods or services to be provided, shipping and delivery terms, and other agreed-upon conditions. The letter of credit ensures that the seller will be paid, even if the buyer defaults or fails to fulfill their payment obligations.
This financial instrument plays a pivotal role in reducing the risk for both buyers and sellers in international trade. It provides assurance to the seller by guaranteeing payment upon meeting the conditions specified in the agreement. At the same time, it offers protection to the buyer by ensuring that payment is only made if the agreed-upon terms are met. This mechanism enhances trust and facilitates smoother international transactions by mitigating payment and delivery risks. Overall, a letter of credit acts as a legally binding document that secures payment and fosters trust in international trade relationships.
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A letter given by a bank or other person, authorising the bearer to receive a specified sum of money at some distant place.
Etymological and pronouncing dictionary of the English language. By Stormonth, James, Phelp, P. H. Published 1874.
Common Misspellings for LETTER OF CREDIT
- ketter of credit
- petter of credit
- oetter of credit
- lwtter of credit
- lstter of credit
- ldtter of credit
- lrtter of credit
- l4tter of credit
- l3tter of credit
- lerter of credit
- lefter of credit
- legter of credit
- leyter of credit
- le6ter of credit
- le5ter of credit
- letrer of credit
- letfer of credit
- letger of credit
- letyer of credit
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