Commercial Letters of Credit are conditional promises to pay if certain documentary requirements are met
The Letter of Credit acts as substitution of credit risk. Essentially, the bank promises to pay under the terms of the Letter of Credit, regardless of the client's financial position at that time. In a best-case scenario, these Letters of Credit will be drawn upon to fulfill an obligation.
- Can be used to purchase goods or services, domestically or internationally
- Requires commercial approval when the client issues the Letter of Credit
- Must be tied to a commercial line of credit
- When client receives the Letter of Credit, no approval necessary