Letter of credit

A commitment from the bank which is given to the buyer or seller, guarantee the buyer’s payment will be delivered on time and with correct amount to the seller. When the buyer is not able to pay, the bank is obligated to pay the rest or the entire amount. Letter of credit is employed frequently in international transactions in order to assure payments receive. Because of the nature of international transactions which includes distance and countries’ rules differences, letter of credit is a significant aspect in international trade. Also, banks do not pay on behalf of the buyer until receiving the confirmation of the shipping.


Letter of credit merits:

Importing or exporting letter of credit

The credit that the buyer opens for importing to his/her country is called importing credit and this credit is perceived as exporting credit to the seller who is in another country.

Revocable LC

In this credit, the buyer or the opening bank can make any changes or modifications in credit conditions. (Without seller’s permission). Obviously, this type of credit is not used a lot, owing to the fact that the seller is not certain about receiving the buyer’s assurance and credit tolerance.

Confirmed L/C

A credit which the buyer is obligated to take the confirmation of his/her bank’s credit note to another creditable bank.  This L/C indicates the unreliability in issuing bank or the political issues or the economic crisis of the buyer’s country.

Unconfirmed L/C

This credit is opened without other bank’s credit. If the “confirmed” word is not indicated in credit terms, this credit will be perceived unconfirmed.

Transferable L/C

Type of credit which the main beneficiary can transfer entire or parts of the opened credit to a person or people. Practically, this credit is a score to the seller.

Untransferable L/C

Type of credit which the beneficiary cannot transfer a part or entire of it to the other.

Irrevocable L/C

In irrevocable L/C, every alteration in credit conditions by the buyer or the opening bank should be agreed by the seller. Generally, sellers welcome this type of credit more.

At sight L/C

A credit which the advising bank pay the fund after checking the buyer’s instruments. (In a condition of considering all credit terms)

back to back L/C

This L/C includes two separate credits. The first credit opens for beneficiary whom she/he is not able to supply or send the commodity. Hence, by leaning on a credit which is for the beneficiary, another credit for the second seller will be opened by the first beneficiary whom he/she can supply and send the commodities.

Red clause L/C

In this credit, the seller can receive some payments as prepayment by the confirming or advising bank, before commodity sent. The reason for the name is that the first time this credit was opened the opening bank wrote the conditions by red ink for the advising bank’s attention and from that time, this type is known as Red Clause L/C.

Revolving L/C

A credit which after every use of credit by the beneficiary, that amount of instruments increases to the initial credit level. In other words, without opening or modifying the new credit, the present credit is renewed spontaneously.

Usance L/C

A credit which the credit payment is not made straightaway after the instrument’s delivery; however, after a certain time it will be paid. Actually seller gives a break to buyer in order to pay after receiving and selling. Usance deal is mostly done in countries which have foreign exchange shortage.