L/C
Letter of Credit
Short definition
A letter of credit is a bank’s payment undertaking against documents; a guarantee letter pays if a specified obligation is not performed. Neither is a cash loan, but both eat limit and sometimes cash collateral.
Detailed explanation
An import L/C gives the supplier bank risk and defers the buyer’s cash to the document date. A standby L/C or bid/performance bond is security; cash conversion is a default event.
A sub-limit is shared with cash drawings. Commission enters all-in. Cash-covered instruments create trapped cash.
Why it matters for the CFO
In trade and contracting, a large share of headroom is paper, not cash. When the limit fills, imports stop.
How to read it
Open L/Cs + guarantees / total limit is non-cash utilisation. A high ratio tightens cash headroom.
Numerical example
Limit 150 mn TL, cash drawn 80, open L/Cs 40, guarantees 20 → cash unused 10, non-cash 60 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.