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Letter of Credit. Definition

A letter of credit is an official document, which is used as a special line of the commercial credit and at the same time about which it is inquired by a buyer of a commodity from a financial institution, in which it is stated that the material welfare of this buyer will allow him or her to effect these payments by installments in time and without any infringements of the law. But at the same time the credit letter defends the interest of a buyer as well as the interests of a seller in this bargain.

These types of business letters are used most often in the deals of the essential value of the international trade. Such transactions are usually concluded when the caterer of a certain product lives in one country and the client, who wants to buy this product, in another one. In present instance it is important to appeal to the Uniform Customs and Practice for Documentary Credits, which is a set of rules about the compiling and use of such letters and at the same time it is utilized by the financial institutions in almost 175 countries of the world in trade finance. This set of rules is also used in order to guarantee that the endorsed public complexes, such as pavements, streets, buildings, etc., will be built in time.

In the credit letter it has to be included such parties as a beneficiary, being the person or organization to be given the зфньуте, the issuing bank, of whom the pretender is a customer, and the advising bank, of whom in his or her turn the beneficiary of this transaction is a customer. At the same time it is very important to remember that nearly all credit letters are irretrievable and this fact means that it cannot be changed, improved or abrogated without a former agreement between the beneficiary, the issuing bank and the advising bank, which can be sometimes called as a confirmating bank. In order to receive the money each beneficiary has to grant such documents as a commercial invoice, consignment note and the documents, which confirm that the shipping was secured against the injuries and losses during the transit, but at the same time the number of these documents may be increased or changed by means of the negotiations or of the requirements, which may be advanced by one person or organization from the participants of the credit letter.