Difference Wiki

Letter of Credit vs. Line of Credit: What's the Difference?

Edited by Huma Saeed || By Sawaira Riaz || Published on December 5, 2023
A letter of credit is a bank's guarantee for a buyer's payment to a seller, while a line of credit is a flexible loan from a bank to a borrower.

Key Differences

A letter of credit is primarily used in international trade to ensure that payments are made on time and for the agreed amount. A line of credit, however, is more like a flexible loan offering the borrower access to funds up to a certain limit.
Sawaira Riaz
Dec 05, 2023
In a letter of credit, banks act as intermediaries between buyers and sellers, guaranteeing payment under specific conditions. Whereas, a line of credit is a direct agreement between a bank and a borrower, where the borrower can draw funds as needed.
Sawaira Riaz
Dec 05, 2023
The letter of credit reduces risk in international transactions by providing a guarantee of payment. While, lines of credit manage risk by setting a credit limit based on the borrower's creditworthiness.
Huma Saeed
Dec 05, 2023
Letters of credit are commonly used in large, international trade transactions. Lines of credit are more versatile, used by individuals and businesses for various needs, including emergencies and short-term financing.
Janet White
Dec 05, 2023
Letters of credit ensure that sellers receive payment, provided all terms are met. Lines of credit offer flexible financing but may lead to debt if not managed properly.
Sawaira Riaz
Dec 05, 2023
ADVERTISEMENT

Comparison Chart

Purpose

Guarantee payment in international trade
Provide flexible borrowing options
Sawaira Riaz
Dec 05, 2023

Users

Used by buyers and sellers in trade
Individuals and businesses for varied needs
Sawaira Riaz
Dec 05, 2023

Nature of Agreement

Between buyer's and seller's banks
Between borrower and lending institution
Huma Saeed
Dec 05, 2023

Payment Terms

Payment guaranteed on fulfilling specific conditions
Borrower decides when to use funds
Sawaira Riaz
Dec 05, 2023

Risk Management

Reduces payment risk in transactions
Credit limit set based on creditworthiness
Harlon Moss
Dec 05, 2023
ADVERTISEMENT

Letter of Credit and Line of Credit Definitions

Letter of Credit

Used to facilitate foreign trade.
The importer provided a letter of credit to gain the exporter's trust.
Sawaira Riaz
Nov 24, 2023

Line of Credit

Revolving credit for ongoing use.
The company’s line of credit helped during low revenue periods.
Sawaira Riaz
Nov 24, 2023

Letter of Credit

Ensures payment under specific terms.
A letter of credit was necessary for the overseas deal.
Sawaira Riaz
Nov 24, 2023

Line of Credit

Borrowing limit set by a lender.
Their business managed cash flow using a line of credit.
Huma Saeed
Nov 24, 2023

Letter of Credit

Financial instrument in international trade.
A letter of credit assured the exporter of timely payment.
Sawaira Riaz
Nov 24, 2023

Line of Credit

Accessible funds up to a certain amount.
He drew from his line of credit for home renovations.
Sawaira Riaz
Nov 24, 2023

Letter of Credit

Bank guarantee for trade payments.
The company used a letter of credit for their international supplier.
Sawaira Riaz
Nov 24, 2023

Line of Credit

Borrowing option with variable interest.
They preferred a line of credit for its flexibility.
Janet White
Nov 24, 2023

Letter of Credit

Bank's commitment to pay the seller.
Their transaction was secured with a letter of credit.
Huma Saeed
Nov 24, 2023

Line of Credit

Flexible loan from a bank.
She used her line of credit to cover unexpected expenses.
Sawaira Riaz
Nov 24, 2023

FAQs

When is a letter of credit used?

Primarily in international trade transactions to guarantee payment.
Sawaira Riaz
Dec 05, 2023

Is a letter of credit a loan?

No, it's a guarantee of payment, not a direct loan.
Sawaira Riaz
Dec 05, 2023

How does a line of credit work?

It allows borrowers to access funds up to a set limit and repay over time.
Huma Saeed
Dec 05, 2023

What can a line of credit be used for?

Anything from business expenses to personal emergencies.
Aimie Carlson
Dec 05, 2023

What is a letter of credit?

It's a bank's promise to pay a seller on behalf of a buyer in international trade.
Sawaira Riaz
Dec 05, 2023

What's needed to obtain a letter of credit?

A buyer's request and sometimes collateral or a deposit.
Sawaira Riaz
Dec 05, 2023

What’s the interest rate on a line of credit?

It varies and is often based on the prime rate plus a margin.
Harlon Moss
Dec 05, 2023

How is a line of credit different from a loan?

It's more flexible, allowing repeated borrowing within a limit.
Aimie Carlson
Dec 05, 2023

Are letters of credit safe?

Yes, they reduce the risk of non-payment in international deals.
Sawaira Riaz
Dec 05, 2023

Can anyone get a line of credit?

Eligibility depends on creditworthiness and financial history.
Sawaira Riaz
Dec 05, 2023

Can a line of credit be increased?

Yes, subject to the lender's approval and borrower's creditworthiness.
Sawaira Riaz
Dec 05, 2023

What are the fees for a line of credit?

They can include interest, annual fees, and transaction fees.
Sawaira Riaz
Dec 05, 2023

Why prefer a letter of credit in international trade?

It offers security against non-payment and contractual breaches.
Sawaira Riaz
Dec 05, 2023

Who issues a letter of credit?

Typically, a buyer's bank issues it to the seller's bank.
Sawaira Riaz
Dec 05, 2023

How long is a letter of credit valid?

It has a specific expiry date mentioned in the agreement.
Sawaira Riaz
Dec 05, 2023

What happens if a letter of credit is not honored?

Legal action can be taken, depending on the terms.
Sawaira Riaz
Dec 05, 2023

Does a line of credit affect credit score?

Yes, depending on how it's used and repaid.
Harlon Moss
Dec 05, 2023

Is a letter of credit revocable?

Some are, but irrevocable ones offer more security.
Janet White
Dec 05, 2023

Can a line of credit be closed?

Yes, by either the borrower or the lender, typically in writing.
Janet White
Dec 05, 2023

What's the difference in risk between the two?

Letters of credit mitigate payment risk, while lines of credit entail borrowing risk.
Aimie Carlson
Dec 05, 2023
About Author
Written by
Sawaira Riaz
Sawaira is a dedicated content editor at difference.wiki, where she meticulously refines articles to ensure clarity and accuracy. With a keen eye for detail, she upholds the site's commitment to delivering insightful and precise content.
Edited by
Huma Saeed
Huma is a renowned researcher acclaimed for her innovative work in Difference Wiki. Her dedication has led to key breakthroughs, establishing her prominence in academia. Her contributions continually inspire and guide her field.

Trending Comparisons

Popular Comparisons

New Comparisons