Types of Letter Of Credit

TYPES OF LETTER OF                 CREDIT

vRevocable and Irrevocable Letter of Credit

vSight LC and Time /Usance LC

vRed Clause Letter of Credit

vRevolving Credit

vTransferable letters of credit

vBack-to-back letters of credit

v Standby letter of credit (SLOC)

•Revocable and Irrevocable Letter of Credit

•A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason. 

•An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. 

•Irrevocable letters of credit provide more security than revocable ones.

An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part but confirming its authenticity.

•Irrevocable Confirmed LC

•A letter of credit issued by a bank on behalf of a buyer that guarantees payment for goods receive, that is also guaranteed by the bank. This type of letter of credit provides the lowest risk for the seller, since it cannot be cancelled by the buyer, and it is backed by the financial resources of the issuing bank.

•Sight LC and Time /Usance LC

•A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents.

•Usance LC also known as Deferred Payment Letter of Credit or Time LC or Term LC is a letter of credit payable at a predetermined time / future date after the conforming documents are presented.

• Red Clause Letter of Credit is a specific type of letter of credit in which a buyer extends an unsecured loan to a seller. Red Clause Letters of Credit permit documentary credit beneficiaries to receive funds for any merchandise outlined in the letter of credit.

•Revolving Credit is Instead of arranging a new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period such as week, month, or year).

•Transferable letters of credit should be issued in an irrevocable form. A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is "transferable". A bank is not obligated to transfer a credit.

•Back-to-back letters of credit are actually made up of two distinct LCs, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the seller.

•Because the two letters of credit are linked and dependent on one another, they are back-to-back letters of credit. It is important to note that back-to-back letters of credit typically mirror each other; that is, they have the same shipping, inspection, and other terms. In this regard, the first letter of credit becomes the collateral for the second letter of credit.

 Standby letter of credit (SLOC) is a guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment.