Legal Definitions - open letter of credit

An open letter of credit is a type of letter of credit that can be paid on a simple draft without the need for documentary title. It is a commercial law instrument under which the issuer, usually a bank, agrees to honor a draft or other demand for payment made by a third party, 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 buy goods from a company in China, they may use an open letter of credit. The U.S. company's bank would issue the letter of credit to the Chinese company's bank, guaranteeing payment upon presentation of a simple draft. This allows the Chinese company to ship the goods without worrying about payment, and the U.S. company to receive the goods before making payment.