A letter of credit is a document issued by a bank which provides a guarantee of funding for a business. Letters of credit are used particularly in overseas transactions, where a company in one country wishes to purchase goods or services from a company in another company. The bank reviews the buyer's credit and provides a guarantee of payment in case of default by the buyer. The person receiving the letter of credit is considered the "beneficiary."
While a letter of credit is issued for a guarantee in a specific transaction, a standby letter of credit is a general letter providing a guarantee for a specific period of time.
Most letters of credit are irrevocable, but occasionally a letter of credit is revocable; that is, it can be canceled by the bank without notifying the beneficiary.
If a business wishes a letter of credit, sometimes it must take out a loan for collateral. The SBA Export Express loan program provides funding for letters of credit for small businesses in the U.S. that wish to purchase from foreign suppliers.
