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Letter of Credit Terminology

There are two types of letters of credit: merchandise and stand-by letters of credit:

Merchandise letter of credit is a payment mechanism whereby a bank substitutes it's credit for the buyer’s credit in an international trade transaction. It is also called a trade or commercial letter of credit and can be domestic or cross border (import or export).

Standby letter of credit is a passive payment instrument that is designed to protect cash flow, not speed it up. It is most often designed to be drawn upon in the event of default or non-performance by the account party/applicant. A standby is also known as a backup, bid, guarantee, performance or security letter of credit.

Letter of credit terminology can be confusing because certain terms are often used interchangeably.  But we can help bring clarity to these methods and make sure you have the options you need.

Contact our International Trade team at 888.461.1864 or international@nationalpenn.com.

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