Business and Personal Finance Dictionary

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• LETTER OF CREDIT
  
  An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letters of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a bank promise to pay the third party for the purchase of goods by the bank’s customer. A standby letter of credit is a bank promise to pay the third party in the event of some defined failure by the bank’s customer, usually, but not always, a failure to pay. Standby letters of credit are often used as credit enhancements for securities.
  
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