In the finance context, a beneficiary is a party for whom, and for whose benefit, a letter of credit is issued. The letter of credit is issued by an issuing bank, a bank whose regular business includes issuing letters of credit, at the request of the applicant. The beneficiary receives the letter of credit at the direction of the applicant to support a payment obligation that the applicant owes (or may in future owe) to the beneficiary under some independent arrangement between the applicant and the beneficiary.

Typically, the arrangement is a contractual relationship between the applicant and the beneficiary, and the obligation supported by the letter of credit is a payment obligation of the applicant under that contract. However, a contractual relationship is not a requirement and the obligations of some applicants that are supported by letters of credit arise under statutes or regulations, for example.

The beneficiary does not need to have any additional relationship with the letter of credit issuing bank in order to qualify as the beneficiary. All the beneficiary must do to obtain payment from the issuing bank under the letter of credit is to satisfy the drawing conditions set out in the letter of credit.

For more on letters of credit in finance transactions, see Practice Note, Letters of Credit in Financing Transactions: Overview.