Letter Of Credit Legal Meaning and Definition

Here is a simplified definition of the legal term Letter Of Credit.

Letter of Credit (n.)

A letter of credit is a formal, legal document that a bank issues to its customer. This document serves as a promise from the bank to pay a specified amount to another party (the creditor) if the bank's customer cannot pay a particular debt when it becomes due. This is a way of assuring the creditor that the money owed to them will be paid, giving the creditor confidence in conducting transactions with the customer.