What is a Letter of Credit?
An instrument of credit issued on behalf of a customer to assure payment for goods and services. A letter of credit is an obligation of the issuing bank to the beneficiary, based solely on the terms and conditions of the instrument itself. Letters of credit may be revocable or irrevocable.
Irrevocable - The letter of credit is a definite commitment of the issuing bank provided that the stipulated documents are presented and that the terms and conditions of the letter of credit are met. An irrevocable letter of credit may be amended or canceled only with the agreement of all parties to the letter of credit.
Revocable - The letter of credit may be amended or canceled at any time by the issuing bank.
Letters of credit may also be payable upon sight or payable by time draft.
Sight - Payable upon presentation of required documents by the issuing bank.
Time - Payable at a date after presentation as stipulated by the letter of credit terms, as evidenced by a time draft to be drawn by the beneficiary for acceptance or on a deferred payment basis per the letter of credit terms.