Introduction to Finance

commercial 
letter of credit
,
 
a bank’s written statement to an individual or fi rm guaranteeing acceptance 
and payment of a draft up to a specifi ed sum if the draft is presented according to the terms of 
the letter (see 
Figure 6.6
).
Importer Bank Financing—An Example 
The issue of a commercial letter of 
credit and its use in international fi nance are shown in this example. The owner of a small, 
exclusive shop in Chicago wishes to import expensive perfumes from Paris. Although the 
shop is well-known locally, its fi nancial reputation is not known widely enough to permit it 
to purchase from foreign exporters on the basis of an open-book account or drafts drawn on 
the fi rm. Under these circumstances, the fi rm would substitute the bank’s credit for its own 
through the use of a letter of credit. Upon application by the fi rm, the bank issues the letter if 
it is entirely satisfi ed that its customer is in a satisfactory fi nancial condition.
The letter of credit is addressed to the French exporter of perfumes. The exporter, upon 
receipt of the commercial letter of credit, would not be concerned about making the shipment. 
Although the exporter may not have heard of the Chicago fi rm, the bank issuing the commercial 
commercial letter of credit 
a bank’s written statement to an 
individual or fi rm guaranteeing 
acceptance and payment of a draft 
up to a specifi ed sum if the draft 
is presented according to the terms 
of the letter
Irrevocable Commercial
Letter Of Credit
AnyBank
P.O. Box 123
Anytown, New York 12345
Cable Address:
AnyBank
Gentlemen:
We hereby authorize you to draw on
AnyBank, Anytown
by order of
J. R. Doe & Company, New York, N.Y.
and for account of
J. R. Doe & Company
up to an aggregate amount of
Fifty Thousand Dollars U.S. Currency
available by your drafts at
90 days sight, for full invoice value, in duplicate
accompanied by
Commercial Invoice in triplicate . . .
Consular Invoice in duplicate . . .
Full set of onboard Bills of Lading to order of AnyBank,
Anytown, marked Notify J. R. Doe & Company, New York, N.Y., and bearing
a separate onboard endorsement signed by the Master and also marked 
freight collect at port of destination . . . .
Relating to shipment of Cotton.
. . . Any charges for negotiation of the draft(s) are for your account.
. . . Marine and war risk insurance covered by buyers.
Drafts must be drawn and negotiated not later than
October 2, 20--
The amounts thereof must be endorsed on this Letter Of Credit.
We hereby agree with the drawers, endorsers, and bonafide holders of all drafts drawn under and in compliance
with the terms of this credit, that such drafts will be duly honored upon presentation to the drawee.
This letter of credit is subject to the Uniform Customs and Practice for Documentary Credits (1974 Revision) Inter-
national Chamber Of Commerce Publication No. 290.
Letter Of Credit
Division
Drafts drawn hereunder must be marked
"Drawn under AnyBank Anytown
L/C Ref.
E-23456
"and indicate the date hereof
May 2, 20--
ABC Company, Inc.
B. Frank, President
$50,000.
Yours very truly,
D. E. Price
Vice President
Authorized Signature