Earendil | Letter Of Credit Blog
WHAT IS THE LC
- A letter of credit (LC) is a document sent from a bank or financial institute that guarantees that a seller will receive a buyer's payment on time and for the full amount.
- In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
- Letters of credit are often used within the international trade industry.
- Banks collect a fee for issuing a letter of credit..
REVOCABLE LC/IRREVOCABLE LC
- Revocable LC can be altered at any time by the issuing bank/buyer without informing the seller.
- Whereas, In Irrevocable LC without consent of seller, no alterations can be made to anyone.
WITH OR WITHOUT RECOURSE LC
- A letter of credit with recourse means if the issuing bank refuses to pay to the nominated.
- A letter of credit without recourse means the nominated bank does not have a recourse if the issuing bank fails to make the payment or does not accept the documents.
CONFIRMED LC/ UNCONFIRMED LC
- When the advising bank also guarantees the payment to the beneficiary, it is called confirmed LC.
- Whereas, Unconfirmed LC Only the Bank issuing the LC will be liable for payment of this LC.
STAND-BY LC
- This LC is closer to the bank guarantee and gives more flexible collaboration opportunity to Seller and Buyer.
- The Bank will honour the LC when the Buyer fails to fulfill payment liabilities to Seller.
TRANSFERABLE LC
- If an LC can be transferred by the beneficiary in whole or in part to a second beneficiary (usually a supplier to the seller) then the LC is a transferable LC.
- The 2nd beneficiary, however, cannot transfer the LC further.
BACK-TO-BACK LC
- Two LCs are issued-one by the bank of buyer to the intermediary & second by the bank of an intermediary to the seller.
RED CLAUSE LC
- The seller can request an advance for an agreed amount of the LC before shipment of goods and submittal of required documents
- This red clause is so termed because it is usually printed in red on the document to draw attention to "advance payment" term of the credit.
DEFERRED PAYMENT LC
- A deferred payment letter of credit, also known as a usance letter of credit, 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.
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.
