You are on page 1of 25

Types of Letter of Credit

Commercial letters of credit,


sometimes referred to as
import/export letters of credit, are
prominent in completing
international trades. The
International Chamber of Commerce
published a Uniform Customs and
Practice for Documentary Credits
(UCP), with which the majority of
commercial letters of credit comply.

Standby letters of credit


Standby letters of credit work slightly differently from most
other types of letters of credit. If a transaction fails and one
party is not compensated as it should have been, the standby
letter is payable when thebeneficiarycan prove that it did not
receive what was promised. This is used more as insurance
and less as a means of facilitating an exchange.
Revocable letters of credit
Revocable letters of credit create leverage for theissuer. It is
contractually legal for one party to either amend or cancel the
exchange at any time, normally without the consent of the
beneficiary. These types of letters are not seen very
frequently, since most beneficiaries do not agree to them, and
the UCP has no provision for them.

Irrevocable letters of credit


Irrevocable letters of credit are more common
than revocable letters of credit. These stipulate
that no amendments or cancellations can
occur without the consent of all parties
involved. Irrevocable Letters of Credit can
either be confirmed or unconfirmed. Confirmed
letters require that anotherfinancial institution
guarantees the payment, which is usually the
case when the beneficiary does not trust the
other party's bank.

Revolving letters of credit


Revolving letters of credit are designed for multiple uses.
They can be used for a series of payments. These are
common among individuals or businesses that expect to do
business together on an ongoing basis. There is usually an
expiration date attached to these letters of credit, often one
year.
Red clause letters of credit
Red clause letters of credit contain anunsecured loanmade
by the buyer, which acts as an advance on the rest of the
contract. Sometimes one party requests a
red clause letter of creditto obtain the funding necessary to
buy, manufacture or transport the goods involved in the
transaction.

Confirmed LC.
In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the
payment by the Bank issuing the LC (issuer), the Bank confirming the
LC is liable for performance of obligations
Unconfirmed LC.Only the Bank issuing the LC will be liable for
payment of this LC.
Transferable LC.This LC enables the Seller to assign part of the letter
of credit to other party(ies). This LC is especially beneficial in those
cases when the Seller is not a sole manufacturer of the goods and
purchases some parts from other parties, as it eliminates the necessity
of opening several LC's for other parties.
Back-to-Back LC.This LC type considers issuing the second LC on the
basis of the first letter of credit. LC is opened in favor of intermediary as
per the Buyer's instructions and on the basis of this LC and instructions
of the intermediary a new LC is opened in favor of Seller of the goods.

Payment at Sight LC.According to this LC, payment is


made to the seller immediately (maximum within 7 days)
after the required documents have been submitted.
Deferred Payment LC.According to this LC the payment
to the seller is not made when the documents are
submitted, but instead at a later period defined in the
letter of credit. In most cases the payment in favor of Seller
under this LC is made upon receipt of goods by the Buyer.
Every letter of credit, regardless of type, is written in an
official document agreed to by both parties before it is
submitted to the guaranteeing financial institution for
review.