A Letter of Credit (LC) is a document that assures the seller that the buyer will pay the seller. It’s granted by a bank and ensures that the seller is rewarded on time and in full. If the buyer is unable to make such a payment, the bank will cover the entire sum or the remaining balance on the buyer’s behalf.
A LC is a financial agreement between a bank, a bank’s customer, and a beneficiary. The letter of credit, which is usually issued by an importer’s bank, guarantees payment to the recipient once the letter of credit’s terms are met.
There are several typical and contemporary letters of credit.
Sight Letter of Credit
Payment or sight credit is a kind of letter of credit that is more immediate and efficient than other types. In this case, relevant documents are made available for payment on sight after being presented to the issuing or nominating banks.
Usance Letter of Credit
Deferred payment is similar to usance credit in that the issuing bank is responsible for payment on the due date specified on the LC without drawing a bill of exchange. The difference between acceptance letters and deferred payment is that acceptance letters require the drawing of a bill of exchange.
Confirmed Letter of Credit
Only irrevocable credits are dealt with in a confirmed LC. The confirmed banker, in addition to the issuing bank, adds its own confirmation to the it and becomes a party to it.
Negotiation Letter of Credit
Negotiation LC might be limited to a single bank or accessible to any willing to negotiate bank. Furthermore, when a negotiating bank fails to negotiate, the issuing bank is always responsible for making payments. If a negotiation is successful, a negotiating bank becomes the holder in due course.
Transferable Letter of Credit
When it comes to transferable credit, the original beneficiary might transfer the credit to others. It’s important to remember that a transfer may only be done once, and it only works with letters of credit that have a transfer clause. This sort of credit offers sellers the authority to ask the advising bank to give credit to all of the transaction’s beneficiaries.
Standby Letter of Credit
In the event of indebtedness, money borrowing, or other breach of contract by the beneficiary, the issuing bank is bound to assist the beneficiary in fulfilling his obligations.
Red and green clause Letter of Credit
In the case of the red clause of the letter of credit, the nominated bank verifies the beneficiary’s request and gives pre-shipment credit to the beneficiary based on the authority granted by the issuing bank to the nominated bank. The issuing bank will be held liable to make the necessary payment if the beneficiary fails to pay the provided advance amount to the nominated bank.
The green clause is similar to the red clause, but it has some additional elements, such as giving early payment for storage charges and insurance by acquiring warehouse receipts as collateral.
For any of the above LC, the following documents are needed while making a presentation.
- Shipping Bill of Lading / Bill for Air Travel / Lorry Receipt for Domestic Supply
- Invoice for commercial purposes
- Certificate of Insurance
- Origin Certificate
- Packing List
- Inspection Certificate
Letters of credit are important for two reasons: first, the introduction of the “letter of credit” has led to a positive effect and increased the number of foreign trade transactions.
Second, it alleviates the parties’ burdens. In general, a LC, allows a trusted third party to play their role by issuing, scrutinizing the presentations, and then allowing payments is the safer way to conduct transactions. ABV Debt will provide advisory services for all your requirements for foreign trade and investments.
