Letter of Credit (LOC)

Definition:

In a commercial transaction, a letter provided by a bank at the request of a buyer, in which the bank promises to make a payment to the seller provided the conditions of the letter are fully satisfied (e.g., certain documents are to be delivered). A Letter of Credit is meant to provide comfort to both the seller (that it will be paid upon satisfaction of conditions and that the credit risk it assumes is on the bank, not the seller) and the buyer (that the seller will only be paid upon satisfaction of conditions).

Return to Glossary