Letter of Credit (LOC) Definition Letter of Credit (LOC) — a legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the LOC. Definition of Letter of Credit. Academic Research on Letter of Credit (L/C) The Law Merchant and the Letter of Credit, Trimble, R. J. Learn more. A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. A letter of credit (LOC) is a promise from a bank to make a payment after verifying that somebody meets certain conditions. Letter of Credit. It is used as a failsafe against an unfulfilled obligation. (1948). With those instruments, payment happens at some future point in time, potentially long after the documents have been submitted (perhaps 30, 90, or 180 days after). Letters Of Credit – Definition, Types & Process Updated on Jan 05, 2021 - 06:49:45 PM A letter of credit is a document that guarantees the buyer’s payment to the sellers. Now let’s consider its definition. What is a Standby Letter of Credit? An alternative form of LC is a deferred payment letter of credit or a usance (or “term”) letter of credit. Meaning: Letter of credit is an financial document for assured payments, i.e. The bank needs to have certain documents in possession before it issues the LC. A bank guarantee is a guarantee given by the bank to the beneficiary on behalf of the applicant, to effect payment, if the applicant defaults in payment. A Standby Letter of Credit is therefore a Letter of Credit that is ready to be used if required. A Letter of Credit or Documentary Credit is a promise by a bank on behalf of the buyer (applicant/importer) to pay the seller (beneficiary/exporter) a specified sum in the agreed currency, provided that the seller submits the required documents by a predetermined deadline.. A letter of credit is a payment method that smoothes the way for international trade or other transactions. With a letter of credit, buyers and sellers can reduce their risk and ensure timely payment and delivery of goods or services.Learning about different types of letters of credit can help you choose which one to use and understand what you’re working with. Standby Letter of Credit: This is a letter of credit with the objective of providing a source of payment in the case of non-performance of a contract. The letter of credit reduces the risks taken by both buyers and sellers that foreign goods will be shipped and payment be made. 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