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What are some situations in which you may require a letter of credit?

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Quick Answer

A letter of credit is primarily used in an international trade transaction, notes TD Bank. The letter of credit lists certain terms and conditions for the exporter, and then the advising bank facilitates payment to that exporter.

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Full Answer

Several features make letters of credit valuable in an international transaction. Irrevocable letters of credit cannot be cancelled or changed without the consent of the banks, buyer and seller, according to TD Bank. In addition, the letter of credit helps mitigate some of the risk for the foreign issuing bank. Under the terms in a letter of credit, an exporter relies upon the creditworthiness of a financial institution as opposed to an individual.

A letter of credit is also known as a documentary credit, mentions the Houston Chronicle. Several qualifications determine whether an individual or business can obtain a letter of credit from a financial institution. Some of the factors include an individual's creditworthiness, total assets and total liabilities. An individual must then fill out an application for a letter of credit. Information to complete for the letter of credit application includes the applicant's full legal name, business name, employer identification number, Social Security number, date of birth, residential address and business address, if applicable.

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