Letter of Credit (LC)

Letter of credit is the letter from bank guaranteeing that buyer payment to seller will be received on time. Letter or
credit has three important elements i.e., the buyer, the seller and the issuing bank. Sometimes there is involvement of
another bank as an advising bank that advises the beneficiary.

Types of LC
1. Irrevocable LC:

Without seller’s permission, no alterations can be made by anyone.

2. Revocable LC:

Can be altered at any time by the bank or buyer without informing seller. Not used frequently and no shield to
seller.

3. Stand-by LC:

This LC ensures payment to seller by bank if anything wrong happens.

4. Confirmed LC:

When advising bank also guarantees the payment to the beneficiary.

5. Unconfirmed LC:

This LC is assured only by issuing bank and not in need of second bank.

6. Transferable LC:

This LC is transferable to the next supplier in the chain that allows beneficiary to provide its own document.

7. Back-to-Back LC:

In back-to-back LC seller gets the letter of credit from the buyer and the seller further transfers the LC to its
suppliers.

8. Payment at Sight LC:

LC at sight is the fastest way to get paid. Payment is due as soon as possible after the bank verifies the
document.

9. Deferred Payment LC:

Deferred LC is a commercial letter of credit that provides that the beneficiary will be paid, not at the time the
beneficiary makes a complying presentation, but at a later, specified, maturity date.

10. Red Clause:

Partial payment before the goods is shipped like an advance against a written confirmation from the seller and
the receipt.

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 Incoterms

Incoterms are the official terms by the International Chamber of Commerce (ICC) to define the responsibilities of
seller and buyer. Incoterms specifies the responsibility of paying and manage shipment, insurance,
documentation, custom clearance etc.

Types of Incoterms

1. CIF (Cost, Insurance & Freight)

The seller delivers the goods, cleared for export, onboard the vessel at the port of shipment, pays for the
transport of the goods to the port of destination.

2. CIP (Carriage & Insurance Paid to)

In Carriage and Insurance Paid To (CIP), the seller assumes all risk until the goods are delivered to the first
carrier at the place of shipment—not the place of destination. Once the goods are delivered to the first
carrier, the buyer is responsible for all risks.

3. CFR (Cost & Freight)

In CFR the seller is required to arrange for the carriage of goods by sea to port of destination and provide the
buyer with the documents necessary to obtain them from the carrier.

4. CPT (Carriage Paid to)

This term means that the seller delivers the goods at their expense to a carrier. The seller assumes all risks,
including loss, until the goods are in the care of the nominated party.

5. DAT (Delivered at Terminal)

Seller delivers the goods, once unloaded from the arriving means of transport, are placed at the disposal of
the buyer at a named terminal at the named port or place of destination.

6. DAP (Delivered at Place)

If a delivery is sent on a DAP basis, the seller is responsible for the delivery of the goods including transport
costs to the named destination at the buyer.

7. DDP (Delivery Duty Paid)

Under DDP the seller assumes all responsibilities and costs for delivering the goods to the named place of
destination. The seller must pay both export and import formalities, fees, duties and taxes. The seller is
responsible for all costs and risk until the goods are unloaded.

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8. EXW (Ex Works)

This term describes that when a seller makes a product available at a designated location, and the buyer of
the product must cover the transport costs.

9. FAS (Free Alongside Ship)

When the seller delivers the goods and cleared for export, by placing them at the agreed port of shipment. At
this point, responsibility for the goods passes from the seller to the buyer. Buyer has the responsibility for
loading goods and any further cost.

10. FCA (Free Carrier)

The free carrier is a trade term dictating that a seller of goods is responsible for the delivery of those goods to
a destination specified by the buyer.

11. FOB (Free on Board)

FOB means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated.
The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility
of the remainder of the transport.

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