Letter of Credit
Financial Dictionary — Banking & Trade Finance
Definition
Letter of Credit A conditional bank commitment issued on behalf of a customer to pay a third party according to certain terms and conditions. The two basic types are commercial letters of credit and standby letters of credit.
Use cases, Example & Why it matters
Use cases
- Used in treasury and financial management for funding, investment, and risk decisions.
- Used to evaluate cash flows, financing costs, and capital structure.
- Used to evaluate cash flows, financing costs, and capital structure.
Example
- Example: Finance teams use **Letter of Credit** when planning funding needs and managing cash and risk.
Why it matters
- Why it matters: Supports liquidity and risk control and improves the quality of financing and investment decisions.