A letter of credit is a guarantee by a bank or someone who has financial backing that a certain person or business has the financial resources to make a payment. Letters of credit are especially common in areas like international trade, where payment is rarely made on delivery. It is yet another form of financial backing that can give both parties security when completing large financial transactions.
Tips for writing a Letter of Credit:
-Don’t use ambiguous language – make sure everything is as clear as possible
-Make sure both parties understand all their terms and obligations
-Make sure the terms of the letter of credit are reasonable for both parties and made in good faith
Sample Letter of Credit:
Mr. Joe Brown
Rising Sun Import/Export Co.
New York, NY
Dear Tangelo Exports,
We have authorized you, Tangelo Exports, to draw on the account of Rising Sun Import/Export Co. for the sum of $500,000 in the case that the payment for transaction #4564545 has insufficient funds. This letter is valid until collection or until the successful closing of transaction #4564545
We agree that this letter of credit will be honored upon presentation at the applicable time and location. This letter of credit has no expiry date.