Types of Letters of Credit

 

Export Letter of  Credit Cycle  5. Product is Shipped

1. Beneficiary Exporter/Seller 

4. 6.

Documents

1. Buyer & Seller Agree

2.  Application

Letter of  Credit

8. Documents

10.

3. Letter of  Credit

7.  Documents

Exporter’s Bank/ Advising Bank

9.

Importer’s Bank/ Issuing Bank

Applicant Importer/Buyer 

2.

 

Confirmed Letter of Credit Cycle  5. Product is Shipped

1. Beneficiary Exporter/Seller 

4.

Buyer & Seller Agree

Confirmed of  6. Letter Credit Documents

3a

10.

1.

/C  L ed irm nf o Confirming Bank . C

3 a .  L / C  C 

2.  Application 8. Documents

3. Letter of  Credit

7.  Documents

Exporter’s Bank/ Advising Bank/ Confirming Bank

Types of Letters of Credit • Revo Revoca cabl blee • Irre Irrevoc vocab able le • Unco Unconf nfir irme med d • Conf Confir irme med d • Tr Tran ansf sfer erab able le • Revo Revolv lvin ing g • Stan and dby •

Red-Cl Red-Claus ausee letter letter of cre credit dit

9.

Importer’s Bank/ Issuing Bank

Applicant Importer/Buyer 

2.

 

Transferable Letter of Credit 3. Transferable LC $30,000

2. Transferable LC $50,000

Exporter/Seller 

7. Documents & BL Seller/Exporters Bank

4. LC $30,000

Manufacturer’s Bank

8. Documents & BL

Advising Bank Transferring Bank

9. $50,000 Received

6. Documents & BL

Importer’s Bank/ Issuing Bank

9. Documents & BL

10. $30,000 Received

1. LC Application

Product

5. Product Shipped to Seller  or directly to Importer 

Importer 

Revocable/Irrevocable • L/C that that may may be amended amended or canceled canceled any time time by the buyer buyer (the (the account account party) party) without the approval of the seller (the beneficiary). Unconfirmed/ Confirmed Letter of Credit • A letter letter of credit credit which which has not not been guaranteed guaranteed or confirmed confirmed by any bank bank other  other  than the bank that opened o pened it. The advising bank merely informs the beneficiary of  the letter of credit terms and conditions.

•

A letter letter of credit credit which which a bank bank other than than the bank bank that that opened it it agrees agrees to honor  honor  as though they had themselves issued it. This additional confirmation is in addition to the obligation of the bank which issued the letter of credit. Transferable letter of credit • Document Document that allows allows the first first benefic beneficiary iary on a standby standby bank assur assurance ance of funds funds to transfer all or part of the original letter of credit to a third party. Revolving letter of credit (L/C)

•

Single Single L/C that that covers covers multi multiple-sh ple-shipmen ipments ts over a long period. period. Instead Instead of  arranging a new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value (a fixed amount amoun t is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period such as week, month, or year). L/Cs revolving in time are of two types: in the

 

cumulative type, the sum unutilized in a period is carried over to be utilized in the next period; whereas in the non-cumulative non -cumulative type, it is not carried over  Standby letter of credit • A guarantee guarantee of of payment payment issued issued by a bank bank on behalf behalf of a client client that is is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in

business transactions, and are proof of a buyer's bu yer's credit quality and repayment abilities. The bank issuing the SLOC will perform brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send notification to the bank of the party p arty requesting the letter of credit (typically a seller or creditor). Red clause letter of credit (L/C) • L/C that that carries carries a provision (traditionally written or typed typed in red ink) ink) which which allows a seller to draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before presenting the prescribed documents. • It is normally normally used used only where the buyer buyer and seller seller have close close working working relationship because, in effect, the buyer is extending an unsecured loan to the seller (and bears the financial risk and the currency risk). • Rare nowaday nowadays, s, the red clause clause L/Cs L/Cs were were once popular popular in fur fur trade trade with with China China and wool trade with Australia.