Difference Between a Loan and a Letter of Credit

by Solace Powell ; Updated July 27, 2017
A letter of credit is written to secure goods.

Credit has long been the grease that lubricates the wheels of commerce. Two of the most common forms of credit, especially for small businesses, are loans and letters of credit.

Letter of Credit

A letter of credit is a letter from a third party, usually a bank or financial institution, promising to pay the seller for goods purchased by its customer. Mainly used in long distance and international transactions, letters of credit are usually sent to the seller once verification is received that the goods have been shipped.

Loan

A loan is money borrowed from a third party to purchase goods. The money is paid to the seller during the business transaction. The transaction is directly between the buyer and the seller.

Transaction Payment

Unlike a letter of credit, the seller receives immediate payment from a loan. A third party is not involved. Letters of credit were typically used before credit cards and traveler checks became everyday usage.

About the Author

Solace Powell began professionally writing in 1998. Her articles have appeared in "The Comet," "The Mace and Crown" and "The Courier." Powell received her Bachelor of Science in engineering from Old Dominion University.

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