Credit Letter
Credit Letter

See Also:
Letter of Credit
Credit Memorandum (memo)
Debit Memorandum
Trade Credit
Proforma Invoice
5 C’s of Credit (5 C’s of Banking)

Credit Letter Definition

credit letter, defined as a letter written by a bank which declares that the account holder has enough funds to pay for something, is most commonly used during importation.

Credit Letter Explanation

A credit letter, explained as a two sided protection for both buyers and sellers, is a valuable tool for minimizing risk. With a credit letter of reference, the concerns of companies selling across boarders are put to ease. This letter serves two functions: proving that a company has the funds to pay for a shipment of products and protecting the purchasing company from loosing money. In this scenario, the bank protects the account holder by transferring funds only when it receives a document which proves that the products have been shipped.

Example

Ivan is both a Russian and American citizen. He has earned his place in the business world by relying on the experience he has gained. He now imports and exports products both to and from both nations. Ivan has a successful business and is trying to move ahead.
Ivan wants to purchase some products from Russia. Despite this, he is not able to visit the supplier. He wants to receive these products while protecting himself from the risks of international trade. To do this Ivan will use a credit letter of explanation.
Ivan talks with his bank to have a line of credit letter made. Then, he sends the letter to the supplier. After having the letter for a few weeks the company attempts to use the letter of credit without sending a shipment notice. Luckily, Ivan is protected by his bank. They refuse to transfer the payment until they received a shipment confirmation.
Ivan appreciates that his bank protected him. He could have lost a large sum of money without the line of credit letter of credit. Ivan thanks his account manager the next time he sees her.
credit letter

ARTICLES YOU MIGHT LIKE

The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

June 12-15th, 2023

SHARE THIS ARTICLE
WIKI CFO® - Browse hundreds of articles