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TeachMeFinance.com - explain Commercial Letter of Credit Commercial Letter of Credit -- An instrument by which a bank substitutes its credit for that of a customer to enable him to finance the purchase of goods or to incur other commitments. The bank issues a letter (or document) on behalf of its client to a supplier and agrees to pay them upon presentation of documentary evidence that the supplier has performed in accordance with the terms of the letter of credit. historic definition... Commercial letter of credit -- A commercial letter of credit is an instrument issued by a banker which authorizes the holder to draw upon the issuing banker at sight or otherwise to an amount not exceeding the amount named in the letter. It is stipulated in the body of the instrument that the amount of all drafts negotiated under it shall be indorsed on it so that it shall always show how much of the credit remains. The names of bankers in various parts of the world (correspondents of the issuing banker) who will cash drafts so drawn are printed on the letter. A considerable part of the foreign purchases made by merchants is effected through letters of credit. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.