Letter of Credit
Definition
A bank's guarantee to pay a seller on behalf of a buyer once specified documents proving shipment are presented. It reduces risk in international trade where the parties do not know each other.
Related Terms in Banking & Payments
Demand Draft
A prepaid instrument a bank issues on a customer's behalf, guaranteeing payment to the named party. Because the funds are taken upfront, it is more secure than a personal cheque for the payee.
Standing Instruction
An authorisation a customer gives their bank to make regular fixed payments automatically on set dates, such as rent or loan instalments, without initiating each one.
NSF (Non-Sufficient Funds)
A payment that fails because the payer's account lacks the funds to cover it. The payee does not receive the money and both parties may incur fees; the transaction must be re-recorded as unpaid.
Bank Float
The gap between when a payment is recorded and when the funds actually clear and become available. Float affects how a business reads its real, usable cash position.
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