Commercial Letter of Credit

Definition:

A form of Letter of Credit designed to facilitate payments between parties in the usual course of trade. Commercial Letters of Credit are generally provided by the bank of the party due to make a payment and effectively substitute the credit risk of the bank for the credit risk of that party, thereby providing comfort to the party due to receive the payment. In the context of global trade, for example, a bank would undertake to pay for an export shipment on behalf of an importer so long as the exporter provides the necessary documents (i.e., clean bill of lading, certificate of insurance, etc.) within a specified period.

See also Standby Letter of Credit.

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