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Types of Letter of Credit

There are various types of letters of credit used in international trade transactions. Some key types include commercial LCs, which are standard documentary credits; transferable LCs, which allow beneficiaries to transfer payment to other suppliers; irrevocable LCs, which cannot be changed without approval from all parties; confirmed LCs, which provide a guarantee of payment from a second confirming bank; and sight LCs, which require payment upon submission of documents that meet the LC conditions. The document discusses 15 total types of letters of credit and their characteristics.

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161 views3 pages

Types of Letter of Credit

There are various types of letters of credit used in international trade transactions. Some key types include commercial LCs, which are standard documentary credits; transferable LCs, which allow beneficiaries to transfer payment to other suppliers; irrevocable LCs, which cannot be changed without approval from all parties; confirmed LCs, which provide a guarantee of payment from a second confirming bank; and sight LCs, which require payment upon submission of documents that meet the LC conditions. The document discusses 15 total types of letters of credit and their characteristics.

Uploaded by

md. Billal Hosen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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T ype s of Le t te r of Cr e dit

1. Commercial LC
2. Export/ Import LC
3. Transferable LC
4. Un-Transferable LC
5. Revocable LC
6. Irrevocable LC
7. Standby LC
8. Confirmed LC
9. Unconfirmed LC
10. Revolving LC
11. Back To Back LC
12. Red Clause LC
13. Green Clause LC
14. Sight LC
15. Deferred Payment LC
16. Direct Pay LC

Types of Letter of Credit


There are various types of letters of credit in trade transactions.
Some of these are classified by their purpose. The following are
the different types of letters of credit:

Commercial LC

A standard LC also called as a documentary credit. For more


information click on Commercial LC

Export/Import LC

The same LC becomes an export or import LC depending on who


uses it. The exporter will term it as an exporter letter of credit
whereas an importer will term it as an importer letter of credit. For
more information click on Export/Import LC

Transferable LC

A letter of credit that allows a beneficiary to further transfer all or


a part of the payment to another supplier in the chain or any other
beneficiary. This generally happens when the beneficiary is just an
intermediary for the actual supplier. Such LC allows the beneficiary
to provide its own documents but transfer the money further. For
more information click on Transferable LC

Un-transferable LC
A letter of credit that doesn’t allow the transfer of money to any
third parties. The beneficiary is the only recipient of the money
and cannot further use the letter of credit to pay anyone.

Revocable LC

An LC that issuing bank or the buyer can alter any time without
any notification to the seller/beneficiary. Such types of letters are
not used frequently as the beneficiary is not provided any
protection. For more information click on Revocable LC

Irrevocable LC

An LC that does not allow the issuing bank to make any changes
without the approval of all the parties.

Standby LC

A letter of credit that assures the payment if the buyer does not
pay. After fulfilling all the terms under SBLC, if the seller proves
that the promised payment was not made. In this situation, the
bank will pay to the seller. In a nutshell, it does not facilitate a
transaction but guarantees the payment. It is quite similar to
a bank guarantee . For more information click on Standby LC

Confirmed LC

Which the seller or exporter acquires the guarantee of payment


from a confirming bank (also called the second bank). This is
primarily to avoid the risk of non-payment from the first bank. For
more information click on Confirmed LC

Unconfirmed LC

A letter of credit that is assured only by the issuing bank and does
not need a guarantee from the second bank. Mostly the letters of
credit are an unconfirmed letter of credit.

Revolving LC

When a single LC is issued for covering multiple transactions in


place of issuing separate LC for each transaction is called revolving
LC. They can be further classified into Time Based (Could be
Cumulative or Non-Cumulative) and Value-Based. For more
information click on Revolving LC

Back to Back LC
Back to back LC is an LC which commonly involves an intermediary
in a transaction. There are two letters of credit, the first issued by
the bank of the buyer to the intermediary and the second issued
by the bank of an intermediary to the seller. For more information
click on  Back to Back LC

Red Clause LC

A letter of credit that partially pays the beneficiary before the


goods are shipped or the services are performed. The advance is
paid against the written confirmation from the seller and the
receipt. For more information click on  Red clause LC

Green Clause LC

An LC that pays advance to the seller just not against the written
undertaking and a receipt, but also a proof of warehousing the
goods. For more information click on Green Clause LC

Sight LC

A letter of credit that demands payment on the submission of the


required documents. The bank reviews the documents and pays
the beneficiary if the documents meet the conditions of the
letter. For more information click on  Sight LC

Deferred Payment LC

An LC that ensures payment after a certain period. The bank may


review the documents early but the payment to the beneficiary is
made after the agreed-to time passes. It is also known as Usance
LC. For more information click on Differed payment LC

Direct Pay LC

A letter of credit where the issuing bank directly pays the


beneficiary and then asks the buyer to repay the amount. The
beneficiary may not interact with the buyer.

Conclusion

As mentioned above, a letter of credit can be of various types


depending on its purpose. It is in the interest of both the buyer
and the seller, to understand all the different types thoroughly and
then pick the one which serves the purpose completely. 1,2

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