Usually, the letter of credit limit applies to commercial loans. It is a loan that owners of businesses apply for. A bank usually grants the businessman a loan for his business. The bank has a way of reckoning what the business is worth and decides what limit of credit to grant a businessman. The bank notifies the businessman with a letter, which is called the letter of credit limit.

The bank would usually state specifically in the letter to the businessman sentences that would say something to the fact that the bank has seriously considered granting additional credit, but that although they would issue a formal letter of credit, which will grant an additional 10,000.00 to what they have already loaned the businessman, they would err on the better side of caution before they could grant a letter of credit limit unless the bank saw positive profits, an increase in profits. The letter of credit limit is a different and separate document from the contract for the loan that the issue, the bank and the recipient of the loan, the businessman will partake. Part of the original loan would have to be paid up before they would issue another letter of credit after this one is issued. There are always delineations of specified payment times.

It is important to note that a letter of credit limit is considered by banks as a binding, contractual agreement between one part, which is the bank and the second party, which is the businessman. The bank is generally called the issuing party of the contract. It could very well be that one bank will advise another bank as to the feasibility of getting paid back by the businessman and a schedule of dates in which scheduled payments on the loan are due. It is important to note that when the bank issues a letter of credit limit that it has to honor that letter and conditions under which it promised the lender, in this case the businessman. The bank has to allow the businessman to draw on the money that has been promised.

Basically, the bank determines the amount that it will promise the businessman by considering the financial needs of the businessman. Setting limits to the exact amount that is allowed to be borrowed is not scientifically figured out. Banks though have their own rules of thumb for granting letters of credit limits. Banks consider the previous record of paying back a loan that had been promised by a letter of credit limit. The bank checks the businessman’s bank records and other financial statements and determines a high or low rating for the granting of a letter of credit limit.