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What is a letter of credit?

Author:
Harold Averkamp, CPA, MBA

A letter of credit is a letter or document issued by a bank for use by one of its customers. The letter of credit states that the bank will guarantee payment up to the stated amount for transactions of its customer (named in the letter of credit).

The letter of credit is helpful if the bank’s customer is traveling in countries where the customer is not known. The letter of credit will allow the customer to purchase goods on credit because the seller is assured of payment. In other words, the credit risk to the seller is greatly reduced because the seller can rely on the credit of the bank instead of the credit of the customer.

A letter of credit should not be confused with a line of credit.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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