Letter of Credit Law and Legal Definition

A letter of credit is a letter issued by a banker to a person to whom credit is given authorizing drafts on the issuing bank or on a bank in the person's country up to a certain sum and guaranteeing to accept the drafts provided the drafts are appropriately made. A letter of credit may also be issued from a bank to a bank or other party abroad authorizing payment of a specified amount of money to a person named in the letter. A letter of credit is different from a bill of exchange. A letter of credit is not negotiable but is cashable only by the paying bank. There are two types of letters of credit namely commercial and traveller’s letter of credit. Commercial letters of credit are used mainly by exporters who seek a guarantee that they will be paid before they ship goods. Traveller’s letters of credit are issued for the benefit of foreign travelers.