Legal Definitions - commercial letter of credit

A commercial letter of credit is a legal document issued by a bank at the request of a customer. It guarantees that the bank will pay a third party (the beneficiary) a certain amount of money if the beneficiary meets specific conditions. This type of letter of credit is commonly used in international trade to ensure that the seller gets paid for their goods or services.

For example, let's say a company in the United States wants to buy goods from a company in China. The U.S. company can ask their bank to issue a commercial letter of credit in favor of the Chinese company. The Chinese company can then ship the goods to the U.S. company, and once the U.S. company receives the goods and confirms that they meet the agreed-upon specifications, the bank will release the payment to the Chinese company.

There are different types of commercial letters of credit, including:

• Irrevocable letter of credit: This type of letter of credit cannot be modified or canceled without the consent of all parties involved.
• Confirmed letter of credit: This type of letter of credit directly obligates a financing agency (such as a bank) doing business in the seller's financial market to a contract of sale.
• Revolving letter of credit: This type of letter of credit self-renews by providing for a continuing line of credit that the beneficiary periodically draws on and the bank customer periodically repays.

Overall, a commercial letter of credit provides security for both the buyer and the seller in an international trade transaction.