A letter of credit is an instrument issued by a financial institution, usually a bank, which authorizes the bearer to demand payment from the institution. A letter of credit can be general, if it is not addressed to any specific person, or special, if it is addressed to a specific person or entity. A letter of credit may also have specific conditions regarding the payment that need to be followed.
Article 5 of the Uniform Commercial Code is focused on Letters of Credit and defines the term as “a definite undertaking that satisfies the requirements of Section 5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.”
[Last updated in June of 2023 by the Wex Definitions Team]