Legal Definitions - import letter of credit

An import letter of credit is a commercial document issued by a domestic bank at the request of an importer, in favor of a foreign seller. It is a type of letter of credit, which is a legal instrument under which the issuer (usually a bank) agrees to honor a draft or other demand for payment made by a third party (the beneficiary), as long as the draft or demand complies with specified conditions, and regardless of whether any underlying agreement between the customer and the beneficiary is satisfied.

For example, if a company in the United States wants to import goods from a company in China, the U.S. company can request its bank to issue an import letter of credit in favor of the Chinese company. The Chinese company can then use the letter of credit to obtain payment from the U.S. company's bank, as long as it complies with the conditions specified in the letter of credit.

Import letters of credit are commonly used in international trade to provide security for both the importer and the exporter. The importer is assured that the goods will be delivered before payment is made, while the exporter is assured that payment will be made once the goods are delivered.