letter of credit: meaning, definition, pronunciation and examples
C2Formal, Technical, Commercial
Quick answer
What does “letter of credit” mean?
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
Audio
Pronunciation
Definition
Meaning and Definition
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
A financial instrument used primarily in international trade, issued by a financial institution, to provide an irrevocable payment guarantee on behalf of its client (the buyer) to a beneficiary (the seller), upon the presentation of specified documents proving that shipment or delivery of goods has occurred.
Dialectal Variation
British vs American Usage
Differences
Terminology is identical. Minor procedural and documentary differences exist in banking practice, but the core term is the same.
Connotations
No significant connotative difference. In both regions, it denotes security and formality in transactions.
Frequency
Equally frequent and essential in the finance and international trade sectors in both regions.
Grammar
How to Use “letter of credit” in a Sentence
[Company A] opened a letter of credit in favour of [Company B].Payment will be made against a confirmed, irrevocable letter of credit.The supplier required a letter of credit from an international bank.Vocabulary
Collocations
Examples
Examples of “letter of credit” in a Sentence
verb
British English
- The buyer must arrange to letter of credit the transaction.
- We will need to LC the payment.
American English
- The buyer must letter of credit the deal.
- We need to get the payment LC'd.
Usage
Meaning in Context
Business
Essential term in international trade finance. 'The exporter insisted on a confirmed letter of credit before shipping the goods.'
Academic
Used in economics, finance, and international business courses to discuss trade finance mechanisms.
Everyday
Rarely used. Might be mentioned when discussing large purchases or business dealings abroad.
Technical
Precise term in banking, with sub-types like 'standby letter of credit', 'transferable letter of credit', 'back-to-back letter of credit'.
Vocabulary
Synonyms of “letter of credit”
Strong
Neutral
Weak
Vocabulary
Antonyms of “letter of credit”
Watch out
Common Mistakes When Using “letter of credit”
- Using 'letter of credit' to refer to a simple letter of recommendation or introduction.
- Misspelling as 'letter of creidt' or 'latter of credit'.
- Incorrect plural: 'letter of credits' instead of 'letters of credit'.
FAQ
Frequently Asked Questions
The applicant (buyer), the issuing bank (buyer's bank), the beneficiary (seller), and often an advising or confirming bank (seller's bank).
No. A letter of credit is a primary payment mechanism, where the bank pays the seller. A bank guarantee is a secondary obligation, where the bank pays only if the buyer fails to do so.
It means the letter of credit cannot be amended or cancelled without the agreement of all parties involved, especially the beneficiary (seller), providing greater security.
Yes, a specific type called a 'transferable letter of credit' allows the original beneficiary to transfer all or part of the credit to another party (like a supplier).
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
Letter of credit is usually formal, technical, commercial in register.
Letter of credit: in British English it is pronounced /ˌletər əv ˈkredɪt/, and in American English it is pronounced /ˌletər əv ˈkredɪt/. Tap the audio buttons above to hear it.
Phrases
Idioms & Phrases
- “As good as a letter of credit (used informally to describe something very reliable).”
Learning
Memory Aids
Mnemonic
Imagine a BANK'S LETTER that gives you CREDIT with a foreign seller. It's not a love letter, it's a money letter.
Conceptual Metaphor
A letter of credit is a SHIELD for the seller and a PROMISSORY NOTE from the bank. It is a BRIDGE of trust in international trade.
Practice
Quiz
What is the primary function of a letter of credit?