| Investopedia: "Letters of Credit are letters from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. Often used in international transactions to ensure that payment will be received." (credit: investopedia.com) |
| Investorwords: "Letters of Credit are binding documents that a buyer can request from his bank in order to guarantee that the payment for goods will be tranferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability." (credit: investorwords.com) |
A Back-to-Back Letter of Credit is a letter of credit that is opened on top of a current letter of credit. Traders use back to back letters of credit to pay their original supplier. The trader obtains a letter of credit from the buyer and then opens a second letter of credit for their supplier. The former beomes collateral for the latter.
| Investordictionary: "Letters of Credit are documents issued by a financial institution on behalf of a buyer stating the amount of credit the buyer has available, and that the institution will honor drafts up to that amount written by the buyer. It gives the buyer the prestige and financial backing of the issuing institution and satisfies the requirements of the seller in completing the transaction. The accepting institution has a prior agreement as to how the buyer will pay for the drafts as they are presented." (credit: investordictionary.com) |
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